Margin of Safety Explained

The principle of buying securities at a price significantly below their intrinsic value, providing protection against errors in calculation or adverse events.

What It Means for Investors

The Concept

If you believe a company is worth $100 per share based on your analysis, a 50% margin of safety means you'd only buy it at $50 or below.

This means even if your estimate is wrong by 30%, you're still buying below intrinsic value. The larger the margin of safety, the more room for error.

Simple Math Example

Intrinsic Value Estimate	$100
Margin of Safety (50%)	$50
If estimate is 30% wrong	$70 actual value
Your cost

Graham's Formulation

Graham taught that the margin of safety should be so large that "an error in calculation or a significant amount of bad luck would be required to produce a loss."

For Graham, a minimum 30% margin of safety was required before recommending any investment.

Graham's Net-Net Formula

Graham looked for companies trading below Net-Net Working Capital (NNWC):

NNWC = Cash + 0.75 × Receivables + 0.5 × Inventory - All Liabilities

Buying below NNWC provided an ext

Key Takeaway