Valuation
Margin of safety
The gap between what you pay and what you think something is worth, sized to absorb being wrong.
How it works
Because every valuation is an estimate, buying at a discount to it protects against ordinary errors in the estimate. A 40% discount means the analysis can be substantially wrong and still work out.
The idea generalises beyond valuation: it is the same logic as not using leverage and keeping cash for emergencies.
Related terms
- Intrinsic valueWhat an asset is actually worth based on the cash it will produce, regardless of its market price.
- Value investingBuying assets for less than an estimate of their intrinsic worth, with a margin of safety.
- Value trapA share that looks cheap on the numbers and stays cheap because the business is deteriorating.
Mentioned in
More in Valuation
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.