MARGIN OF SAFETY
“Layers of redundancy are the central risk management property of natural systems…. Redundancy is ambiguous because it seems like a waste if nothing unusual happens. Except that something unusual happens—usually.” Nassim Taleb
“Confronted with a challenge to distil the secret of sound investment into three words, we venture the motto, Margin of Safety.” Ben Graham
“In the final chapter of the 'Intelligent Investor' Ben Graham forcefully rejected the dagger thesis; “Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.” Forty two years after reading that, I still think those are the right three words.” Warren Buffett
"The idea of a margin of safety, a Graham precept, will never be obsolete." Charlie Munger
"The three most important words in investing -- ‘margin of safety’ and the four most dangerous - ‘this time is different.’" Frank Martin
“Low price is the ultimate source of margin for error.” Howard Marks
“Is there a sufficient margin of safety?” Bruce Berkowitz
“If you buy stock with a sufficient margin of safety, the probability is with you.” Li Lu
“We bring a jaundiced eye to our research process and actively focus on what can go wrong with our investments. Such an approach leads to an insistence on an adequate margin of safety.” Jake Rosser
“The concept of margin of safety turns out to be the most important concept in investing. That’s not exactly a secret because it’s all over the books that Benjamin Graham wrote more than 50 years ago.” David Polen
"Obviously, if you understood a business perfectly — the future of a business — you would need very little in the way of a margin of safety. So the more volatile the business is — or possibility is — but assuming you still want invest in it, the larger the margin of safety... Well, if you’re driving a truck across a bridge that holds — it says it holds 10,000 pounds — and you’ve got a 9,800 pound vehicle, you know, if the bridge is about six inches above the crevice that it covers, you may feel OK. But if it’s, you know, over the Grand Canyon, you may feel you want a little larger margin of safety, in terms of only driving a 4,000 pound truck, or something, across. So it depends on the nature of the underlying risk." Warren Buffett
“Most of the top ranked business schools around the world do not understand margin of safety. For them, low risk and low returns go together as do high risk and high returns. Over a lifetime, we all encounter scores of low-risk, high return bets. They exist in all facets of life. Business schools should be educating their students on how to seek out and exploit these opportunities.” Mohnish Pabrai
“The best investments have a considerable margin of safety. This is Benjamin Graham’s concept of buying at a sufficient discount that even bad luck or the vicissitudes of the business cycle won’t derail an investment. As when you build a bridge that can hold 30-ton trucks but only drive ten-ton trucks across it, you would never want your investment fortunes to be dependent on everything going perfectly, every assumption proving accurate, every break going your way.” Seth Klarman
“We only want to buy when we can pay less than 60% of a conservative appraisal of a company’s value, based on the present value of future free cash flows, current liquidation value and/or comparable sales…. trying to create a big margin of safety.” Mason Hawkins
"There is no investment rule that remains immutable except the margin of safety. There are always breaks and the trick is to begin to anticipate, if you can, where the break points will be and shift. Not the disciplines and not the framework but the tactics that are involved." Peter Cundill
"Use an appropriate margin of safety to manage risk. This way, you will not lose too much when you are wrong, and you will make much more when you are right. This way you can let your portfolio generate higher than market returns with less risk, in a sustainable and stable way." Li Lu
“The core concept of value investing is margin of safety. The idea of value investing should be first and foremost about reducing risk. If you reduce risk the returns will take care of themselves.” CT Fitzpatrick
“No matter how wonderful [a business] is, it’s not worth an infinite price. We have to have a price that makes sense and gives a margin of safety considering the normal vicissitudes of life.” Charlie Munger
"The concept of a margin of safety is that an investor should purchase a security at a price sufficiently below his estimate of its intrinsic value that he will have protection against permanent loss even if his estimate proves somewhat optimistic. An analogy is an investor standing on the 10th floor of a building, waiting for an elevator to carry him to the lobby. The elevator door opens. The investor notices that the elevator is rated for 600 pounds. There already are two relatively obese men in the elevator. The investor estimates their weights at about 200 pounds each. The investor knows that he weighs 175 pounds. The investor should not enter the elevator. There is an inadequate margin of safety. Maybe he underestimated the weights of the two obese men. Maybe the elevator company overestimated the strength of the elevator’s cable. The investor waits for the next elevator. The door opens. There is one skinny old lady in the elevator. The investor says hello to the lady and enters the elevator. On his ride to the lobby, he will enjoy a large margin of safety." Ed Wachenheim
“Purchasing a business at a price that provides reasonable assurance of a generous margin for error is an erudite way of saying to ourselves, ‘Buy low, stupid’.” Frank Martin
“We strive to avoid situations without our cherished dual margin of safety – the quality of business and the price. We need both to counter our inevitable mistakes and unforseen events.” Christopher Bloomstran
“There is no margin of safety in top-down investing.” Seth Klarman
"A margin of safety gives you an edge over just blindly buying stocks or an index fund." Chris Browne
“Insist on an adequate margin of safety, or the ability to weather periods when things go less well than you expected.” Howard Marks
“I want very modest downside. I am very interested in the risk factors. The overused word of ‘margin of safety’ is very much in our head. We are measuring and thinking about what can go wrong.” Chuck Royce
"We only invest when the price is attractive, which provides both a margin of safety and favorable prospective returns." Allan Mecham
"As the future is uncertain, my advice is to remember the importance of margin of safety." Jean-Marie Eveillard
"You have to figure out what a company is worth either based on its cash flows or assets and then apply a large enough discount to have a sufficient margin of safety." Robert Vinall
“The function of margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.” Ben Graham
“Margin of safety for us comes from the quality of the business and second from buying into it at a substantial discount to our estimate of intrinsic value. Neither is sufficient on its own for us to be interested.” Mark Curnin
“The most important three words in investing, stated by Mr. Graham, probably more than 60 or 70 years ago: Margin of Safety. What that means to us, our interpretation of that statement made by Mr. Graham and repeated so many times over the years by Warren Buffett is that we are looking at investing in very, very high-quality companies that have great franchises and that have had these great franchises for many years.” David Polen
“The best long term margin of safety comes not from an investment’s price but from the value of a company’s sustained competitive advantage over very long periods of time. That’s what quality investing is all about.” Thomas Russo
“[Ben Graham] gave the world the concept of margin of safety. We utilise that very much & the margin of safety for us is the quality of each business that we are investing in." Jeff Mueller
“The margin of safety is not just in the price you pay, it's also in the quality of the business, it's in the balance sheet of the business and the accounting and also in terms of the quality of top management. When we bought shares of Constellation Software, I don't remember how much we paid but we paid a reasonable valuation, I think 18 or 19 times earnings. To us the real margin of safety was Mark Leonard.” Francois Rochon
“Data shows that owning financially superior and competitively advantaged businesses can offer a margin of safety in almost any market…. In periods of market decline, earnings stability and financial strength can serve as a “margin of safety” that typically offers resilience amid downturns. Characteristics like earnings power, financial stability, and competitive moats can allow companies to weather tougher times and can enable them to power through a crisis faster and stronger than competitors.” Polen Capital
“When people talk about margin of safety in investing, they usually talk about things that are financial in nature. They talk about asset value or they talk about sustainable return on equity or whatever. I'm much more focused on the nature of business franchise and the replicability of that, and the quality of the people running it.” Steve Mandel
"A good business model provides the ultimate margin of safety." Jake Rosser
“The greater the margin of safety implicit in a deeply depressed market or stock, the less the risk and the greater the expected return.” Frank Martin
"Always keep a large margin of safety, even if you're playing with house money." Joel Greenblatt
"Because we look for investments that have a healthy margin for error, a mis-judgment of analysis is rarely a disaster. We don’t need much to go right in order to make money, and in many cases we can get a lot wrong and still break even." David Einhorn
"You might want to give some thought to how you'll fare if the future doesn't oblige. In short, what is it that makes outcomes tolerable even when the future doesn't live up to your expectations? The answer is margin for error." Howard Marks
"If I pay too much upfront, I'd better understand everything there is to know about the company since there is no margin of safety. If I invest when its undervalued, I can be wrong about a whole host of issues and still make a good return." Guy Spier
"We take very much to heart Ben Graham’s notion of margin of safety and use what we believe are demonstrably conservative assumptions. If you can do that and still conclude a business is undervalued, that’s built-in margin of safety." Ken Burgess
“All my stock picking is 100% based on the concept of a margin of safety, as introduced to the world in the book ‘Security Analysis,’ which Graham co-authored with David Dodd. By now I have my own version of their techniques, but the net is that I want to protect my downside to prevent permanent loss of capital." Michael Burry
"We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than it's price, we're not interested in buying. We believe this margin of safety principle, emphasised by Ben Graham, to be the cornerstone of investment success." Warren Buffett
"What attracts us to the whole concept of value investing is the idea of having a margin of safety, in terms of value over price. That margin of safety only exists if values are stable and it only improves if value increases." C.T Fitzpatrick
"We greatly doubt whether the man who stakes money on his view that the market is heading up or down can ever be said to be protected by a margin of safety in any useful sense of the phrase… Thus, in sum, we say that to have a true investment there must be present a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience." Benjamin Graham
“We have to be comfortable buying in at a valuation that provides us with a margin of safety, irrespective of any activism we will attempt to initiate and that may be unsuccessful.” Barry Rosenstein
"We insist on a margin of safety to minimize the effects of bad judgments and maximise the results of good ones." Frank Martin
"To help minimize the risk of permanent loss, I look for a margin of safety in the stocks we purchase." Ed Wachenheim
"Buying bargains builds in a margin of safety to counter the inevitable misjudgements or misfortune." Seth Klarman
"The margin of safety in our investment strategy is to identify fundamentally good businesses and adhere to strict valuation discipline." Jeffrey Ubben
"Margin for error is a critical element in defensive investing. Whereas most investments will be successful if the future unfolds as hoped, it takes margin for error to render outcomes tolerable when the future doesn't oblige. An investor can obtain margin for error by insisting on tangible, lasting value in the here and now: buying only when price is well below value; eschewing leverage; and diversifying." Howard Marks
"The further off you get into the future, the greater your chances of misjudging what will happen. Therefore, the greater the allowance needed for a possible margin of error the more difficult it becomes to determine true value." Phil Fisher
"Investing is inherently about predicting the future. But predictions can never reach 100% accuracy; they can only fall between zero and something approaching 100%. So when we make a judgement, we need a large buffer. This is called margin of safety. Because there is no way to ever be sure, you must always remember the margin of safety no matter how many other things you grasp." Li Li
“Business and capitalism is brutal, dog eat dog. All these guys want to encroach on your territory all the time. Businesses are not steady state entities, they fight for their survival and so when trying to project the future for business we should demand a huge margin of safety.” Mohnish Pabrai
“Perfect information does not exist; there are only confidence intervals. This is, of course, at the heart of why a margin of safety matters so greatly in investing. If you start with the premise that there is only so much one can know, of course you need a margin for error. The less you know, the greater the margin needed.” Todd Combs
“A margin of safety provides room for error, imprecision, bad luck, or the vicissitudes of the economy and stock market. It offers a degree of downside protection.” Seth Klarman
Further Reading:
‘Thinking About Margin of Safety’, Investment Masters Class. 2021.