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Margin of Safety Commentary

Currently Browsing Margin of Safety Commentary :

An Overview:
A Margin of Safety arises when the price of the security falls substantially below a conservatively derivedintrinsic value. The intrinsic value of a security is the value an outside investor would pay for it based on future income the security will generate (from distributions and capital gains) generally over a reasonable time period of 3-5 years. A margin of safety can be found in any security. For stocks, the most important question is whether the company will continue to function as a going concern in a potentially difficult competitive and economic environment and whether its enterprise value will be permanently impaired. The same news events can occur that create a Margin of Safety (or discount to intrinsic value) for a bond or for a stock.

In the case of stock invesments, the growth rate of the economy where the company does its primary business
is typically used for its earnings growth rate to determine a conservaively derived intrinsic vlaue. This is where Margin of Safety investing is often confused simply with Value investing, which although correct on one level is insufficient because value is often confused with price.


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