Definition
Coined by Benjamin Graham, margin of safety is the difference between estimated intrinsic value and the price paid. It provides a cushion against valuation errors, unforeseen events, or market volatility. Value investors typically seek 25-50% margin of safety.
Formula
Margin of Safety = (Intrinsic Value - Market Price) / Intrinsic Value × 100%
Example
If you estimate intrinsic value at $100 and buy at $70, your margin of safety is 30%. Even if your valuation is 20% too high (true value $80), you still have protection.
FAQ
What is Margin of Safety?
The discount between intrinsic value and purchase price that protects against errors.
How do you calculate Margin of Safety?
A common formula for Margin of Safety is: Margin of Safety = (Intrinsic Value - Market Price) / Intrinsic Value × 100%
Why is Margin of Safety important?
Margin of Safety helps investors evaluate valuation and make more informed decisions.