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Margin of safety investing advice

How Does Margin of Safety Work? Benjamin Graham, the father of value investing and mentor of legendary investor Warren Buffett , pioneered the concept of margin of safety. It will be large at one price, small at some price, nonexistent at some still higher price. Margin of safety accounts for all of these possibilities. To account for these risks, value investors often seek to buy stocks that are discounted from their intrinsic value.

With regards to Walmart, Nick Sleep noted you could have paid times the price in the early years and still earned a ten percent annual return. Furthermore, ten years later you could have paid a X PE and earned ten percent returns. That really is the magic of compounding. If the destination is intact, stay the course. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin of safety principle, emphasised by Ben Graham, to be the cornerstone of investment success.

Margin of Safety is about ensuring survival, both now and in the future. History has shown high-quality companies tend to weather near-term volatility, crises, corporate mishaps and competitive threats better than lower quality businesses - and go on to prosper in time. Exceptional companies are, by definition, those best protected against competitors, disruptive technologies, poor governance, and other factors that can destroy value. A portfolio of exceptional companies can be both more concentrated and safer than a portfolio of ordinary companies.

They develop new products, grow markets and have a level of control over their destiny. Investors who own them enjoy a Margin of Safety. Graham are: Margin of Safety. What that means to us, is that we are looking at investing in very, very high-quality companies that have great franchises and that have had these great franchises for many years. We utilise that very much and the margin of safety for us is the quality of each business that we are investing in.

When we bought shares of Constellation Software, I don't remember how much we paid but we paid a reasonable valuation, I think 18 or 19 times earnings. To us the real margin of safety was Mark Leonard. They talk about asset value or they talk about sustainable return on equity or whatever. I'm much more focused on the nature of business franchise and the replicability of that, and the quality of the people running it.

Compounding machines are defined by high quality businesses, not cheap price. Portfolio Margin of Safety Where I once looked for a margin of safety in every investment, I now consider Margin of Safety in a portfolio context which allows me to relax the requirements for a small portion of the portfolio. Charlie Munger has talked about how depending on the probabilities you assign to the up and down case, it may be a perfectly reasonable bet to accept the possibility of a zero if your upside is 5x or more.

I agree. Given the nature of their insurance business, this may come as little surprise. Well it would sound like a big number to you. It would not be a huge percentage of the net worth, but it would be a significant. An everyday example is index investing. Buffett has long analogised investing to baseball, but better.

There are no strike-outs. When you swing, no matter how well you connect with the ball, the most runs you get is four. In the wider world, every once in a while, when you step up to the plate, you can score 1, runs. The story encapsulates the incredible asymmetric opportunities that can exist in markets. Searching for these outliers and sizing such positions appropriately can enhance portfolio performance while not exposing the portfolio to an undue level of risk. The air begins to get thin at those altitudes!

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What is margin of safety and how to apply it in investing?

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