A Quote by Michael Mauboussin
Edge also implies what Ben Graham....called a margin of safety. You have a margin of safety when you buy an asset at a price that is substantially less than its value. As Graham noted, the margin of safety 'is available for absorbing the effect of miscalculations or worse than average luck.' ...Graham expands, "The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price."
Related Quotes
The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price.
The price we are willing to pay for safety cannot be infinite. It is distasteful to put a price on human life, but the more we spend on safety, the less we will have for our other goals.
The difference between the price we pay for a stock and its liquidation value gives us a margin of safety. This kind of investing is one of the most effective ways of achieving good long term results.
It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity - provided that the buyer is informed and experienced and he practices adequate diversification. For, if the price is low enough to create a substantial margin of safety, the security thereby meets our criterion of investment.
To have a true investment, there must be a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.
If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you'd need. If you're driving a truck across a bridge that says it holds 10,000 pounds and you've got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it's over the Grand Canyon, you may feel you want a little larger margin of safety.
To a value investor, investments come in three varieties: undervalued at one price, fairly valued at another price, and overvalued at still some higher price. The goal is to buy the first, avoid the second, and sell the third.
High leverage is unsafe, not just for a company but the entire economy... LBOs are reducing the safety. Management loses the power to do many things. It has no margin for error and less margin for additional risk.
I buy stocks when they are battered. I am strict with my discipline. I always buy stocks with low price-earnings ratios, low price-to-book value ratios and higher-than-average yield. Academic studies have shown that a strategy of buying out-of-favor stocks with low P/E, price-to-book and price-to-cash flow ratios outperforms the market pretty consistently over long periods of time.
No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what Graham called the "margin of safety" - never overpaying, no matter how exciting an investment seems to be - can you minimize your odds of error.
Calculate a stock's price/earnings ratio yourself, using Graham's formula of current price divided by average earnings over the past three years.
Inflation, especially a slow steady rise in prices, encourages producers, because it means that they can commit themselves to costs of production on one price level and then, later, offer the finished product for sale at a somewhat higher price level. This situation encourages production because it gives confidence of an almost certain profit margin.
Even with a margin of safety in the investor's favor, an individual security may work out badly. For the margin guarantees only that he has a better chance for profit than for loss - not that loss is impossible. But as the number of such commitments is increased the more certain does it become that the aggregate of the profits will exceed the aggregate of the losses.
Clearly the price considered most likely by the market is the true current price: if the market judged otherwise, it would quote not this price, but another price higher or lower.
Bernanke and company are trying to reflate the economy with almost stated objective of inflation at 2 percent and higher in order to provide some type of safety margin for a future recession. That's where they want to go.
No matter that astronauts and cosmonauts had perished in precisely designed and carefully tested machines. Solid engineering could always provide a safety margin, because the engineers believed, there was complete safety in numbers.
