Margin of safety is the gap between what you think a business is worth and what the market is asking for it. Graham invented the term; Buffett kept reciting it for sixty years. The point is not the math — it's the humility built into the math: your estimate of intrinsic value is wrong by some unknown amount, so the gap has to absorb that error before it can pay you.

The Math

Margin of Safety = (Intrinsic Value − Current Price) / Intrinsic Value

Expressed as a percentage. A stock you value at $100 trading at $60 has a 40% MOS; at $90 it has 10%; at $100 it has none.

>40%
Real margin
Even if your valuation is wrong by 30%, you still pay below value. This is the "buy with conviction" zone for value investors. Rare; usually requires market dislocation or contrarian thesis.
20-40%
Modest margin
Adequate cushion for normal estimation error. Most diversified value-investing returns come from accumulating positions in this band.
<20%
Effectively no margin
Single mistake in your assumptions and you are paying full price or above. The market may agree with your valuation — that itself should make you suspicious.

Buffett's 9000-Pound Truck Analogy

Buffett: "If you understand a business — and few people will be able to understand all businesses — you can value it. And if it's selling at a big discount from that value, you buy it. You don't drive a 9,800-pound truck across a bridge that says it holds 10,000 pounds. You go down a little ways and find one that says 15,000."

The bridge holds 10,000 — your truck weighs 9,800. The numbers say it's safe. But you do not know if the bridge engineer was an optimist, if the truck weighs slightly more than the spec sheet says, if there is metal fatigue. You want a 50% margin, not a 2% one. Same for stocks.

The most common mistake with margin of safety is treating intrinsic value as a single number. It's a range — "somewhere between $80 and $120" — and the margin is computed against the low end of your range, not the midpoint. If you cannot get a meaningful gap against your low estimate, the position size should be small or zero.

What Margin of Safety Is Not

  • Not a stop-loss. If price drops further after you buy, that may simply be a wider margin — or it may be the market correctly seeing something you missed. MOS does not tell you which.
  • Not a guarantee. Bridge engineers can be wrong. Your valuation can be wrong. MOS reduces, not eliminates, the cost of being wrong.
  • Not a momentum signal. A stock with deep MOS may stay there for years. Patience is part of the system.

MOS = (intrinsic value − price) / intrinsic value · compute against the low end of your range
>40% = real margin · 20-40% = modest · <20% = essentially none
The 9,800-pound truck analogy: you want a 15,000-pound bridge, not a 10,000-pound one

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