A principle of investing in a market when only purchases securities and the market price remains below the intrinsic value. It can also be defined as the difference between the market price and estimation price. This difference provides an opportunity to the investor to create a risk free environment for investment. In other words, when the market price is well below estimated intrinsic value the difference will be margin of safety(Investopedia.com, 2003).
The concept of Margin of Safety is presented by Benjamin Graham. It is known to have a central value in investing philosophy. The great Warren Buffett stated that the margin of safety are the most important words in investing(Staff, 2011).Benjamin Graham said “If one has to distill the secret of sound investment in three words, we can venture the motto that, MARGIN OF SAFETY is the most important factor”
The term significantly important as it represents the difference between a stock price and intrinsic value or worth. According to Graham, the more the stock price value below the intrinsic value, the more would be the margin of safety. In other words, if one has a healthy margin of safety, means buying the stocks at a lower price, the more would be the possibility to reduce the risk of loss. Yet, the securities may decline due to many reasons(Staff, 2011). But having a margin of safety in investment, one already has a built in protection for the tough times to come.
Warren Buffet said “There are three most important words in investment…. Margin of Safety”.
Seth Klarman said “A margin of safety can be achieved when securities are purchased at prices significantly below the base value to allow for the human error, bad luck or extreme volatility in complex and unpredictable, rapidly changing world”.
It can be found that there are many investors who have made it a basic principle. They consider safety most important. The results indicates that the success ratio was quite high. Whereas, the investments which are under taken without considerable margin of safety have proved to be risky. The trend indicated that there were more loss than the profit. Hence, it is imperative for the investor to take into consideration all important factors. It is important that all the problems can he handled well before time(Staff, 2011).
Warren Buffet said “It is better to be approximately right then to be precisely wrong:”