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Posts Tagged ‘“margin safety”’

Margin of Safety is one of the most popular strategies of value investing made popular by legends such as scholarship Benjamin Graham (father of value investing) and Warren Buffet. Margin of safety is simply the value of a stock investment model where the investor provides a safety margin in its estimate of the value. In value investing, the investor estimates (or predicts) the intrinsic value of a stock. The concept is that every action has an intrinsic value and price changes of this intrinsic value is just differences resulting from the action of market forces. The stock is often revert to its intrinsic value when market forces weaken. Thus, investors who buy shares when the price is below the intrinsic value and investors who sell shares when the price is higher than the intrinsic benefit. But what makes the investment value is difficult to predict the intrinsic value of the shares. There are no set rules to discover that. Investors should develop their own strategies and models for this purpose, according to the availability of information and analytical tools at his disposal. Many traders use various indicators such as book value, an open offer, P / E ratio, the ratio of assets to liabilities, institutional investments, investments in other companies, etc. to find the intrinsic value of the action. Margin of safety investment strategy easily overcome this difficulty of predicting the intrinsic value. Investors assign a safety margin as percent of predicted value (intrinsic is typically 30-40 percent of the intrinsic value). Safety margin that investors buy shares when they are trading below the margin of safety. In this way, he / she can reduce the risk / prediction error of the intrinsic value. The higher the percentage margin of safety greater the chance of risk, the greater the chance of profit. Example is the predicted intrinsic value of a stock is $ 10 and the safety margin is 30%, the trader buys the stock only if the current price is below $ 7 ($ 10 - 30% $ 10). If the actual value is intrinsic only $ 9, and the dividend yield at this level, the investor has a profit worth 2 million. The main advantage of margin of safety investment strategy is that it provides a margin rather than a fixed price to reduce risk. It supports all types of investors, both experienced and novice investors, and does not require calibration position or performance requirements of the market. But the disadvantages are that it does not attribution rules of safety margin and does not take account of market factors. There is also possibility of substantial loss when the safety margin is less and the scarcity of opportunities when the safety margin is high.