Margin of Safety

Margin of Safety refers to the difference between the Intrinsic Value of an investment and its market price. It acts as a cushion for investors, allowing them to withstand potential declines in the investment’s value without incurring a loss.

Example: If a company’s Stock is valued at $100 per Share based on its fundamental analysis (intrinsic value), but is currently trading at $70, the margin of safety is $30. This indicates that the stock is undervalued by 30%, providing a buffer against possible market volatility.

Case: An investor evaluates a real estate property that has a calculated intrinsic value of $500,000 but is available for purchase at $400,000. The margin of safety here is $100,000, suggesting that the investor has a 20% cushion should the property’s market value decrease.