Margin of Safety

Margin of safety is the difference between a stock's calculated fair value and its current market price. The concept was introduced by Benjamin Graham in The Intelligent Investor and became the cornerstone of Warren Buffett's investment philosophy.

If you estimate a stock's fair value at $200 and it trades at $150, you have a 25% margin of safety. That $50 cushion protects you against errors in your analysis, unexpected business setbacks, or broader market downturns.

Why Margin of Safety Matters

No valuation model is perfect. DCF analysis depends on growth assumptions that may not materialize. Relative valuation assumes peers are fairly valued. Analyst targets can be biased. Every estimate carries uncertainty. Margin of safety acknowledges this uncertainty and builds protection into your investment process.

Graham recommended at least a 33% margin of safety for defensive investors. The appropriate margin depends on the quality and predictability of the business. Stable companies may require a smaller margin; volatile companies require a larger one.