Margin of Safety (MOS)

• Margin of Safety is three most important words in investing.
• It was first introduced by the ‘father of value investing’ Benjamin Graham
•  “Margin of safety if the difference between the intrinsic value of a stock and its market price.”
• It suggest that you must buy a stock only when it is worth more than its price in the market. This disciplined pursuit of bargains makes value investing very much a risk-averse approach.
•  If the said stock is of a high quality company, it is advisable to buy it at any price that is 20% or lower than the company’s intrinsic value
• If the said stock is of a company that is not a good one, you must not buy it for more than 50% of the intrinsic value
• Why use MOS?
• “What margin of safety does is that it protects you from poor decisions and downturns in the market.”
• To maintain the MOS discipline is the greatest challenge to the invesor.
•  Most peoples buy stocks when the prices are rising - just because we do not want to miss out on the paper profits that other peoples are making by betting on rising stocks.
• A value invesor shall standing apart from the crowd, and challenging conventional wisdom. And, it can be very lonely.
• But, if you can do it with utmost discipline, you can earn great returns from the stock markets over the long run.
• Warrent Buffett say:-
•  “We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we’re not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success.”
• “When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing.”
• How much MOS is good margin? The answer varies from one investor to the next. It depends on:-
• How much back luck are you willing and able to tolerate?
• How much volatility in business values can you absorb?
• What is your tolerance for error?
• How much you afford to lose? Lossing money is an inevitable part of investing - there is nothing you can do to prevent it. An intelligent investor must take responsibility for ensuring that your never lose most or all of your money.
• Using MOS and avoid to pay too much for an investment - you minimise the chances that your wealth will ever disapper or suddenly de bestroyed.
• Graham remind us, an intelligent investor must focus not just on getting the analysis right. He must also insure against loss if his analysis turns out to be wrong - as even the best analyses will be at least some of the time.

"Confronted with a challenge to distil the secret of sound investment into three words, we venture the motto, Margin of Safety." - Benjamin Graham

"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." - Seth Klarman

"A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others, who are not as concerned about loss." - Seth Klarman

References:-

•  Insure Your Investments With a Margin of safety, Safal Niveshak