Margin of safety

The margin of safety itself is the gap between the price you pay and what you think a stock might be worth.

This expression was a favourite of the father of value investing techniques, Benjamin Graham.

He suggested that the best way to ensure you don't overpay for an investment is to buy when the market price is below a stock's 'intrinsic' value. That value may be obtained by applying a number of different valuation techniques for example, discounted cash flow.

The margin of safety itself is the gap between the price you pay and what you think a stock might be worth. So, for example, if you think a share is worth £2.50 and you only pay £2, you have a margin of safety of 50p (useful should you get your original £2.50 valuation wrong).

In theory, the bigger the safety margin, the better. However, the problem with setting it too wide is that you may eliminate some good stocks from your target population.

Most Popular

Wood-burning stove vs central heating ‒ which is cheapest?
Personal finance

Wood-burning stove vs central heating ‒ which is cheapest?

Demand for wood-burning stoves has surged as households try to reduce their heating costs this winter. But how does a wood burner compare with central…
29 Nov 2022
Fan heater vs oil heater – which is cheaper?
Personal finance

Fan heater vs oil heater – which is cheaper?

Sales of portable heaters have soared, as households look to cut their energy costs. But which is better: a fan heater or an oil heater? We put them t…
21 Nov 2022
Best regular savings accounts – November 2022
Savings

Best regular savings accounts – November 2022

You can earn an attractive rate on the best regular savings accounts. We tell you the best on the market to take advantage of right now
29 Nov 2022