Application To Investing
Using margin of safety, one should buy a stock when it is worth more than its price on the market. This is the central thesis of value investing philosophy which espouses preservation of capital as its first rule of investing. Benjamin Graham suggested to look at unpopular or neglected companies with low P/E and P/B ratios. One should also analyze financial statements and footnotes to understand whether companies have hidden assets (e.g., investments in other companies) that are potentially unnoticed by the market.
The margin of safety protects the investor from both poor decisions and downturns in the market. Because fair value is difficult to accurately compute, the margin of safety gives the investor room for error.
A common interpretation of margin of safety is how far below intrinsic value one is paying for a stock. For high quality issues, value investors typically want to pay 90 cents for a dollar (90% of intrinsic value) while more speculative stocks should be purchased for up to a 50 percent discount to intrinsic value (pay 50 cents for a dollar).
Read more about this topic: Margin Of Safety (financial)
Famous quotes containing the words application to, application and/or investing:
““Five o’clock tea” is a phrase our “rude forefathers,” even of the last generation, would scarcely have understood, so completely is it a thing of to-day; and yet, so rapid is the March of the Mind, it has already risen into a national institution, and rivals, in its universal application to all ranks and ages, and as a specific for “all the ills that flesh is heir to,” the glorious Magna Charta.”
—Lewis Carroll [Charles Lutwidge Dodgson] (1832–1898)
“I think that a young state, like a young virgin, should modestly stay at home, and wait the application of suitors for an alliance with her; and not run about offering her amity to all the world; and hazarding their refusal.... Our virgin is a jolly one; and tho at present not very rich, will in time be a great fortune, and where she has a favorable predisposition, it seems to me well worth cultivating.”
—Benjamin Franklin (1706–1790)
“After all, the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world.”
—Calvin Coolidge (1872–1933)