Margin of Safety
The margin of safety in investment is a financial concept that refers to the difference between the current market price of an asset and its intrinsic value.
The margin of safety is important because it represents the "cushion" that investors have when they buy an investment. If the intrinsic value is higher than the market price, then there is a margin of safety and the investment has the potential to provide a good return. However, if the intrinsic value is lower than the market price, then there is no margin of safety and the investment may not be a good value.
Margin of Safety Formula
Margin of Safety = Intrinsic Value - Market Price
Use of Margin of Safety
The concept of margin of safety can be a powerful tool for investors when it comes to managing risk and protecting their assets. By proactively establishing a margin of safety, investors set a measure to protect their investments against unpredictable changes in the market. This is often done by setting a lower limit when making an investment that protects against significant downside risk while providing greater peace of mind. In addition, this strategy offers investors the opportunity to buy an asset at a discount, potentially leading to higher returns over time.