Margin of Safety

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The term "Margin of Safety" was coined by Benjamin Graham and David Dodd in the popular investing book, "Security Analysis" (1934).

Margin of Safety refers to the difference between a stock's intrinsic worth (a value which no one is certain) and the price that an investor is purchasing the stock at. This difference is crucial for an investor, it provides a cushion where the investor may be incorrect in his/her prediction on price and not lose on his/her investment.

If an investor believes a certain company should be valued at 25 per share, and the stock is currently trading at 20 per share, the investor has a margin of safety between the 20 dollar entry and the 25 dollar valuation. Even if the investor has over estimated the price of 25 per share, the margin of safety allows him/her to be wrong up to 5 dollars before they take a loss.

Having a margin of safety implies a few things : an investor is valuing a company correctly based on its intrinsic worth, purchasing a company when its market price is lower than its intrinsic value, and markets will correct themselves to the intrinsic value.

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