The philosophy of investment in growth stocks parallels in part and in part contravenes the margin-of-safety principle.
- The growth-stock buyer relies on an expected earning power that is greater than the average shown in the past.
- Thus he may be said to substitute these expected earnings for the past record in calculating his margin of safety.
- In investment theory there is no reason why carefully estimated future earnings should be a less reliable guide than the bare record of the past; in fact, security analysis is coming more and more to prefer a competently executed evaluation of the future.
- Thus the growth-stock approach may supply as dependable a margin of safety as is found in the ordinary investment— provided the calculation of the future is conservatively made, and provided it shows a satisfactory margin in relation to the price paid.
The danger in a growth-stock program lies precisely here.
- For such favored issues the market has a tendency to set prices that will not be adequately protected by a conservative projection of future earnings.
- (It is a basic rule of prudent investment that all estimates, when they differ from past performance, must err at least slightly on the side of understatement.)
- It will be large at one price, small at some higher price, nonexistent at some still higher price.
- If, as we suggest, the average market level of most growth stocks is too high to provide an adequate margin of safety for the buyer, then a simple technique of diversified buying in this field may not work out satisfactorily.
- A special degree of foresight and judgment will be needed, in order that wise individual selections may overcome the hazards inherent in the customary market level of such issues as a whole.
CHAPTER 20 “Margin of Safety” as the Central Concept of Investment
Also read:
- Margin of Safety Concept in The Business Venture of Buying and Selling Stocks
- Margin of Safety Concept in Conventional and Unconventional Investments
- Margin of Safety Concept in Speculation and Investment
- Margin of Safety Concept in Diversification
- Margin of Safety Concept in Undervalued or Bargain Stockss
- Margin of Safety Concept in Growth Stocks
- Margin of Safety in Good-Quality and Low-Quality Stocks.
- Margin of Safety Concept in Common Stocks
- Margin of Safety Concept in Bonds and Preferred Stocks
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