Some consider the amount of cash in the companies book as the margin of safety whereas others consider growth and better business environment as “margin of safety”.
Invest in companies with moat and margin of safety, and the probability of your investment paying off, in the long run, is very high.
So what is “margin of safety”?
The margin of safety in investment in coined by Warren Buffet and so let us understand with a quote from him.
If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety.
The definition can vary from investor to investor. Some consider the amount of cash in the companies book as the margin of safety whereas others consider growth and better business environment as “margin of safety”. For some great management is the margin of safety.
Being in the market for almost a decade, I am still learning to move from being a trader to an investor. I have a tough time not to look at price movement of my investments in each of my stocks. The plan is to look at the performance of the companies from quarter to quarter and view the results of the company without worrying too much about the price. Still, I can’t achieve it and I admit I check the price of the stocks on a daily basis. Yes, you read it right. I want to be doing things once every quarter but I do it daily.
The reason I do it daily is I trade based on chart patterns and has always treated price as the ultimate indicator. As an investor, I only need to worry about the business more than the price.
As I follow the quarterly results of the company and go through the annual reports, I find it less intriguing to check the price movement of my investments. The knowledge I gain about the company, management, and the business provides me with the margin of safety and I can stop checking the price.
So my view about the margin of safety is, how much you know about the company, the people who run the company and the business.
Let me share examples of recent blunders I have done to my open portfolio to understand margin of safety with real examples.
I exited from Ashok Leyland and the main reason for my exit was – I did not have the margin of safety with respect to the company or the management though I had good insight into the business. I assumed the chart pattern formed in Nifty will lead to correction led by auto sector. The decision to exit was completely non-business related and it has proved to be a great learning experience for me.
Other position in my portfolio like Pidilite or Zydus Wellness where even when I was in the losses, wasn’t worried because I understood the business, the company and the management much better. More margin of safety.
What is your view about “margin of safety“? Share them in comments below.
Margin of safety means what is worth of 100 rs. and you but it for 70rs.
Sandeep, the only question is how you can value what is worth 100Rs.
Nice article sir. But I couldn’t clearly understood regarding your mistake in exiting ashok Leyland. AL is in bearish grip now. So it’s not a bad decision to exit now with whatever profit you have and enter later when it is relative cheaper(< 104-105 range ).
I don't have much idea about stocks but I still think long-term investment concepts are difficult to follow when the markets are all time high and a chance of deep correction knocks at the door.
One request.
I recently got unaudited report of RIL for the previous quarter. It's difficult to go through whole 15 pages of reports full of big numbers. I would like you to have a small article regarding how to decode a financial report with ease for people like me who are not from financial background.
The mistake was, I could have managed a better rate. Entry was spot on at around 80 but exit at 90+ could have been timed better to exit around 100+ or there abouts.
Yes I will write about the annual and quarterly reports and how one should look at them in a nutshell. Ideally you should be looking at 3 figures in the quarterly reports.
1. YoY sales or revenue growth
2. YoY expense comparison
3. Impact on EPS.
Annual reports and full year reports, one can look for lot more details.
We have to buy share less than it’s intrinsic value so the diff. Between intrinsic value and purchase prise is mos. for e.g. we put intrinsic value for Ashok Leyland 60 then u try to buy at 50 diff 10 is mos
Agree and you also have to play the waiting game of when the stock gets to under your perceived value.
Yes.. need to wait long..
For me margin of safety is the price. If the stock prices doesn’t go down below my stop loss, I feel my view is right and provides me margin of safety needed.
That is a good MoS for sure.
Margin of safety is very important but the parameters varies. These parameters can be taken as 1 cash with company 2 end product of the company and its market 3 management which include the group controlling it and last be it’s earning potential . Tata steel is a good example but on all the parameters one can identifie various companies . For a novice the best bet is investment in a PS U as GOI will take care and modest returns are definite leaving few like MTNL etc
PSU has never worked and so I avoid them all the time for investment. ONGC since its IPO has only given a returns of 6% CAGR and it is better off investing in FD than in ONGC. The story is similar for most of the PSUs with very few exceptions.
I completely disagree that for being safe, one should consider a PSU.