Graham in his famous book devotes a chapter on how margin of safety is important. Can someone give examples how can we find this margin of safety?


1 Answer 1


The margin of safety can be calculated by computing an intrinsic value and comparing it to the current price. For example, if the intrinsic value was 100$ and the stock is trading at 80$ your margin of safety would be 20%.

In practice, the difficult part is getting the intrinsic value right. No matter how you compute it, you will always rely on assumptions about future growth and earnings which are unlikely to be exactly right. This is where the margin of safety comes into play. A large margin of safety allows the investor make a profit even if the estimates where a bit off.

The ideal case for Graham would be a company that is trading below its book value as this has a built-in margin of safety even without projecting future earnings. A company that has a book value of 100$/share (after deducting debt) but is trading at 80$ would be a very safe investment as liquidation of the company will still return more than you paid.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .