Benjamin Graham has no interest in paying $1 for $1 of value; only interested in buying at a substantial discount from underlying value.
Benjamin Graham understood that an asset or business worth $1 today could be worth 75 cents or $1.25 in the near future.
He also understood that he might even be wrong about today's value.
Therefore Graham had no interest in paying $1 for $1 of value. There was no advantage in doing so, and losses could result.
Graham was only interested in buying at a substantial discount from underlying value.
By investing at a discount, he knew that he was unlikely to experience losses.
The discount provided a margin of safety.
Investors need a margin of safety
Because investing is as much an art as a science, investors need a margin of safety.
A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for
According to Graham, "The margin of safety is always dependent on the price paid. For any security, it will be large at one price, small at some higher price, nonexistent at some still higher price."
Buffett described the margin of safety concept in terms of tolerances: "When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing."
What is the requisite margin of safety for an investor?
The answer can vary from one investor tot he next.
Most investors do not seek a margin of safety in their holdings.
Institutional investors who buy stocks as pieces of paper to be traded and who remain fully invested at all times fail to achieve a margin of safety.
Greedy individual investors who follow market trends and fads are in the same boat.
The only margin investors who purchase Wall Street under-writings or financial-market innovations usually experience is a margin of peril.
Benjamin Graham understood that an asset or business worth $1 today could be worth 75 cents or $1.25 in the near future.
He also understood that he might even be wrong about today's value.
Therefore Graham had no interest in paying $1 for $1 of value. There was no advantage in doing so, and losses could result.
Graham was only interested in buying at a substantial discount from underlying value.
By investing at a discount, he knew that he was unlikely to experience losses.
The discount provided a margin of safety.
Investors need a margin of safety
Because investing is as much an art as a science, investors need a margin of safety.
A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for
- human error,
- bad luck, or
- extreme volatility
According to Graham, "The margin of safety is always dependent on the price paid. For any security, it will be large at one price, small at some higher price, nonexistent at some still higher price."
Buffett described the margin of safety concept in terms of tolerances: "When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing."
What is the requisite margin of safety for an investor?
The answer can vary from one investor tot he next.
- How much bad luck are you willing and able to tolerate?
- How much volatility in business values can you absorb?
- What is your tolerance for error?
Most investors do not seek a margin of safety in their holdings.
Institutional investors who buy stocks as pieces of paper to be traded and who remain fully invested at all times fail to achieve a margin of safety.
Greedy individual investors who follow market trends and fads are in the same boat.
The only margin investors who purchase Wall Street under-writings or financial-market innovations usually experience is a margin of peril.
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