Always include a margin of safety into your purchase price

Always include a margin of safety into the price you're willing to pay for a stock. 

If you later realize you overestimated the company's prospects, you'll have a built-in cushion that will mitigate your investment losses. 

The size of your margin of safety should be larger for shakier firms with uncertain futures and smaller for solid firms with reasonably predictabvle earnings. 

For example:

• a 20% margin of safety would be appropriate for a stable firm such as Wal-Mart, but
• you would want a substantially larger one for a firm such as Abercrombie & Fitch, which is driven by the whims of teen fashion.