Margin of Safety

Definition

Margin of Safety
Margin of Safety is a risk management principle used in investing, representing the difference between a security’s intrinsic value and its current market price. By purchasing assets at prices substantially below their estimated intrinsic value, investors create a cushion that helps protect against errors in valuation or unforeseen market downturns. This concept minimizes potential losses and increases the likelihood of favorable returns even if market conditions deteriorate. A larger margin of safety offers greater protection and reduces the chance of permanent capital loss, whereas a smaller margin signals closer proximity to the asset’s true value and potentially higher risk. This approach is fundamental to disciplined, long-term value investing and strategic capital preservation.

See also