Margin of Safety

In short

Buying below intrinsic value to protect against estimation errors

If you think a stock is worth $100, don't pay $100 — pay $70. That 30% discount is your margin of safety. If your estimate is wrong, you still might not lose money.

Coined by Benjamin Graham, margin of safety is the difference between a stock's intrinsic value and its market price. A 20-30% margin provides a buffer against valuation errors, unforeseen events, and market volatility.

Formula

Margin of Safety = (Intrinsic Value - Market Price) ÷ Intrinsic Value × 100

Thresholds

<0: Overvalued — no margin of safety
0-15: Thin margin — limited protection
15-30: Adequate margin
>30: Wide margin — strong buy candidate

Related concepts

Intrinsic Value — The market price is what people are willing to pay right now. Intrinsic value is an estimate of what the stock is actually worth based on the company's cash flows and assets. If a $40 stock has an estimated intrinsic value of $55, the gap ($15) is what practitioners call the margin of safety.
DCF Model — Imagine a friend promises to pay you $100/year for 10 years. Would you pay $1,000 today? Not quite — money tomorrow is worth less than money today. DCF calculates what future cash flows are worth right now.
Value Investing — Value investors hunt for companies the market has mispriced — cheap relative to their true worth. Like finding a $100 bill selling for $70. The strategy requires patience: sometimes the market stays wrong for years.