Margin of Safety – Beginning Investor Terms
Posted on | February 24, 2010 | 2 Comments
Margin of Safety is a concept I write about a lot. It is the make or break for any investment. While I may fudge the amount from time to time, all investments have to have a margin of safety to be worth shelling out my cash. But what is a Margin of Safety?
It is a term that Benjamin Graham and David Dodd coined in their seminal book, Security Analysis. First Graham began with the idea of intrinsic value. Or how much a company is worth (in opposition to how much it costs). If the price of a companies’ share is lower than the intrinsic value of that share then the difference is a margin of safety. Graham argued for a minimum margin of safety of 33%. More is better, but harder to find. The purpose is to protect an investor in case some part of your analysis in determining the intrinsic value is incorrect, or to help protect if the market or luck turns against you.
In a recent example VOXX, my NCAV value was $9.82/share. By my reckoning this would be VOXX’s intrinsic value. The price when I bought VOXX was $6.60/share. This gave me a Margin of Safety of about right under 33%. Any questions? Please post in the comments or email me chroma@chromainvesting.com
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2 Responses to “Margin of Safety – Beginning Investor Terms”
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January 11th, 2011 @ 10:54 pm
Hi I just discovered your blog and since I am totally new to stock investments except through MFs .
I plan to read up everything here which I think is very well explained in simple terms.
Keep up the great work !!
February 6th, 2011 @ 7:27 pm
Thanks for feedback!