Margin of Safety

Margin of safety is the rule of buying only well below your calculated value. Judge intrinsic value at 100 and you buy only under 70.

The cushion exists because the calculation can be wrong. You may have misjudged growth, or an unforeseen problem may appear. The margin absorbs that error.

It is the same principle as designing a bridge to carry far more than its expected load. Even a careful calculation needs slack, because the unexpected happens.

A larger margin brings two benefits: losses are smaller when you are wrong, and gains are larger when you are right, because buying cheaply leaves more room to recover.

But cheapness alone is not a margin of safety. In a business that is genuinely deteriorating, the calculated value keeps falling too. Distinguishing a low price from a good reason for it is the whole task. Many investors use roughly 30% as a working rule, narrowing the cushion for stable businesses and widening it where the outlook is uncertain.