PREVENTING VULNERABILITIES

Margin of safety should be employed by mutual fund investors to minimize poor investment decisions

A large number of investors are oblivious to the commonly occurring accounting term – margin of safety. The term margin of safety is the key to protecting gains in the stock market and buying stocks with minimum downside risks.

It helps investors understand the gap prevailing between a stock’s price and its actual value.

WHAT IS MARGIN OF SAFETY

Popularized by American investor Benjamin Graham (also known as the father of value investing), margin of safety refers to the difference between a stock’s prevailing market price and its intrinsic value.

Simply put, when the market price of a stock is significantly below its intrinsic value, the difference is termed as “margin of safety”.

A stock’s true value is termed its intrinsic value. It is defined as the monetary benefit the investor can avail of or expect to receive from it in the future.

When it comes to margin of safety here is what top investors from around the world have said about it. American business magnate, investor and philanthropist, Warren Buffett says, “‘Margin of safety’: the three most important words in investing.”

According to billionaire investor, hedge fund manager, and author, Seth Klarman: “A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are humans and do make mistakes. It is adherence to the concept of margin of safety that best distinguishes value investors from all others, who are not as concerned about loss.”

HOW IS MARGIN OF SAFETY CALCULATED