Italy's Elena Fanchini gets tangled in the safety net after crashing in the first training session for the women's alpine skiing downhill event during the Sochi Winter Olympics at the Rosa Khutor Alpine Center. Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.
For example, if you are investing in a bond, you would probably want to make sure that the company has historically generated enough cash flow to cover interest payments and other fixed charges 3-times, 4-times, or even 5-times over in any given year. Graham simply took this simple fixed income concept and applied it to all assets, including stocks.
The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future. If the margin is a large one, then it is enough to assume that future earnings will not fall far below those of the past in order for an investor to feel sufficiently protected against the vicissitudes of time.
You have to have the knowledge to enable you to make a very general estimate about the value of the underlying business. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30, pounds, but you only drive 10, pound trucks across it. And that same principle works in investing.
If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. Legendary value investor and founder of the Baupost Group hedge fund Seth Klarman see Benjamin Graham: Risk-Averse Value Investing Strategies for the Thoughtful Investor. A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.
By always buying at a significant discount to underlying business value, and giving preference to tangible assets over intangibles. What then will we aim to accomplish in this book? Read the original article on Vintage Value Investing.
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Trending Tech Finance Politics Strategy Lifestyle Sports Video All. You have successfully emailed the post. Here's an explanation of Ben Graham's concept of 'margin of safety'.
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Three stocks that score high in ‘margin of safety’ strategy - The Globe and Mail
SO WHAT IS MARGIN OF SAFETY? Margin of safety is a very easy concept to understand. This makes sense, right? San Francisco's Golden Gate Bridge. I love this analogy, and Warren Buffett has used it multiple times: More from Vintage Value Investing: Ben Graham Vintage Value Investing Investing Stocks.
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