Margin of Safety

What it is\nThe gap between what you estimate a business is worth (intrinsic value) and what the market is asking you to pay (price). A 30% margin of safety means: pay 70 cents for something you believe is worth $1.\n\n## Graham's framing\nBenjamin Graham, in The Intelligent Investor: "Margin of Safety" is a chapter title and the central organising idea of value investing. The logic: nobody's estimate of intrinsic value is precise. By buying at a discount, you protect yourself against the inevitable errors in your own valuation work.\n\nIf you estimate fair value at $100 and you're wrong by 20%, an investment at $70 still makes money. An investment at $99 doesn't.\n\n## How Buffett applies it\nBuffett: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."\n\nThe margin of safety is how you operationalise rule 1. It's why he's comfortable holding cash for years rather than chase fully-priced markets — the math of compounding rewards avoiding loss far more than chasing gain.\n\n## How to size the margin\n- Defensive (Graham): 30–50% discount to fair value. Built for unsophisticated investors and uncertain businesses.\n- Quality (Buffett): 15–30%. Higher-quality businesses earn smaller required margins because their intrinsic value is more knowable.\n- Speculative: don't. If you can't calculate a margin of safety, you're speculating, not investing.