Margin of Safety

Margin of safety is the gap between a stock estimated intrinsic value and its lower market price, providing a cushion against errors and bad luck. The bigger the discount you pay below true worth, the more protection you have if your estimate is too optimistic. It is a core principle of disciplined value investing.

Only buy when the price sits meaningfully below your conservative estimate of intrinsic value, often by 20 to 50 percent for riskier situations. A larger margin of safety reduces the impact of mistakes and unforeseen problems. It does not eliminate risk, but it tilts the odds in your favor over time.

If you estimate a company is worth 100 dollars per share and buy it at 70 dollars, you have a 30 percent margin of safety. Even if your valuation proves 15 percent too high, you still bought below the corrected value.