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Margin of Safety

As mentioned in earlier posts, value investors like to make use of assumptions that they can be relatively certain about (i.e. last twelve months' earnings, balance sheet valuations, etc). Even so, we know that nothing ever plays out as one would expect. As such, we make use of a "margin of safety". This means that we will never buy into a security at its full intrinsic value (unless there are some pretty certain growth prospects which will be discussed in the next post).

 

Once the intrinsic value is calculated, an appropriate margin of safety is considered in order to arrive at an entry price. If the security can be had for less than this entry price it should be purchased.

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For those readers that are just joining us now, this is the 5th installment of a "basics" course on value investing. This is important preparatory reading, especially if you are very new to value investing, in order to understand valuations which will be discussed on this site. You can access the entire course by clicking on the "basics" link under the topics heading to the left. I also recommend subscribing to this site's RSS feed by clicking the orange link to the right.

 

The next post will discuss the value of growth and will conclude the posts on value investing basics. There will definitely be more educational posts in the future but these 6 articles are the basics required in order to understanding an investment thesis on this site.