How large a margin of safety is typical?

It varies depending on the quality and predictability of the business. Generally a larger margin is required in more uncertain industries and when future earnings visibility is lower. High-quality companies with stable cash flows can justify a smaller margin, but one never buys without any margin at all.

Do you not miss good companies by always demanding a discount?

Yes. That is a deliberate cost - the price of discipline. Leaving money on the table is better than buying without downside protection and then being forced to sell at the wrong time.

What if the market never offers the right price?

Then one does not buy. It happens that a company is followed for several years without finding a margin of safety. That is the process working. We only buy when the conditions are right.

Is margin of safety the same as buying cheap stocks?

No, and that is an important distinction. Cheap stocks without quality are value traps. One seeks quality companies that are temporarily trading below their fair value. The margin of safety is always relative to the company's true worth, not to an absolute price level.

Glossary

Margin of safety

The difference between a company's intrinsic value and its market price. The foundation of thinking about risk and asymmetric return.

What it is

A buffer against being wrong

Margin of safety is a concept coined by Benjamin Graham and developed further by Warren Buffett. In short, it is the difference between what a company is estimated to be worth and what it costs to buy on the stock market. If fair value is 100 kronor per share but the stock trades at 70 kronor, the margin of safety is 30 percent. That margin serves a dual purpose: it protects against errors in the valuation, and it increases potential returns if the analysis is correct.

Protection against mispricing: No analysis is perfect. A margin of safety ensures mistakes do not become catastrophic.
Asymmetric return: Buying at a discount limits the downside while leaving the upside intact. That is the price of discipline.
Patience as strategy: Demanding a margin of safety means occasionally missing opportunities. Leaving money on the table is better than buying without a safety net.

In practice

Focus on the downside

The process starts by calculating a fair value based on normalised earnings, future cash flows and the company's quality characteristics. Stocks are bought only when the share price is sufficiently below fair value. How large a margin is required depends on the quality of the business. High-quality companies with predictable cash flows can justify a lower margin. More cyclical businesses require larger buffers. The result is that one sometimes watches good companies for months or years without buying.

“If we take care of the downside, the upside takes care of itself.”

Amos Fonder

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Common questions about margin of safety

Related concepts

Glossary

Fair value

An estimate of what a stock is actually worth. Not what the market believes today, but what the company is worth based on its fundamentals.

GARP

Growth at a Reasonable Price. The strategy that refuses to choose between growth and value, seeking the best of both.

Swedish equity fund

An equity fund that primarily invests in Swedish listed companies. Amos Value is a Swedish equity fund with a mandate to hold at least 80 percent in Sweden.

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