Margin Of Safety
The term was popularized by Benjamin Graham (known as "the father of value investing") and his followers, most notably Warren Buffett. Margin of safety doesn't guarantee a successful investment, but it does provide room for error in an analyst's judgment. Determining a company's "true" worth (its intrinsic value) is highly subjective. Each investor has a different way of calculating intrinsic value which may or may not be correct. Plus, it's notoriously difficult to predict a company's earnings. Margin of safety provides a cushion against errors in calculation.
Margin of safety is a concept used in many areas of life, not just finance. For example, consider engineers building a bridge that must support 100 tons of traffic. Would the bridge be built to handle exactly 100 tons? Probably not. It would be much more prudent to build the bridge to handle, say, 130 tons, to ensure that the bridge will not collapse under a heavy load. The same can be done with securities. If you feel that a stock is worth $10, buying it at $7.50 will give you a margin of safety in case your analysis turns out to be incorrect and the stock is really only worth $9.
There is no universal standard to determine how wide the "margin" in margin of safety should be. Each investor must come up with his or her own methodology.
Investment dictionary. Academic. 2012.
Look at other dictionaries:
Margin of safety — may mean: Margin of safety (financial) in a financial context. Margin of Safety by Seth Klarman is a classic value investing book. ISBN 9780887305108 Margin of safety (accounting) in cost accounting. Margin of safety in engineering especially… … Wikipedia
margin of safety — noun the margin required in order to insure safety in engineering the margin of safety is the strength of the material minus the anticipated stress • Syn: ↑safety margin, ↑margin of error • Hypernyms: ↑margin, ↑index * * * : an arithmetical index … Useful english dictionary
Margin of safety — With respect to working capital management, the difference between 1) the amount of long term financing, and 2) the sum of fixed assets and the permanent component of current assets. The New York Times Financial Glossary * * * margin of safety UK … Financial and business terms
margin of safety — With respect to working capital management, the difference between (1) the amount of long term financing and (2) the sum of fixed assets and the permanent component of current assets. Bloomberg Financial Dictionary * * * margin of safety UK US… … Financial and business terms
margin of safety — The difference between the level of activity at which an organization breaks even and a given level of activity greater than the breakeven point, especially the forecast level in a breakeven analysis. The margin of safety may be expressed in the… … Accounting dictionary
margin of safety — The difference between the level of activity at which an organization breaks even and a given level of activity greater than the breakeven point The margin of safety may be expressed in the same terms as the breakeven point, i. e. sales value,… … Big dictionary of business and management
margin of safety — The difference between an individual or organization’s current operating activity and a critical performance measure like a *break even or insolvency point. A margin of safety can be measured in *values, Volumes, or *percentages, and the concept… … Auditor's dictionary
margin of safety — Ops the difference between the level of activity at which an organization breaks even and the level of activity greater than this point. For example, a margin of safety of $300,000 is achieved when the breakeven point is $900,000 and sales reach… … The ultimate business dictionary
margin of safety — The margin, to be noted by a trustee in making an investment of funds of the trust, between the value of the security and the amount of the investment. 54 Am J1st Trusts § 426 … Ballentine's law dictionary
margin of safety — The safety factor, expressed either in a percentage or a ratio, by which the ultimate failing load of components exceeds the design limit load … Aviation dictionary