1. Estimate intrinsic value
Use a DCF, an earnings multiple, or asset value to estimate what the business is worth per share.
How to calculate
How to calculate margin of safety
To calculate margin of safety, subtract the current market price from your estimate of intrinsic value, then divide by intrinsic value and multiply by 100. If a stock is worth $100 by your intrinsic-value estimate and trades at $70, the margin of safety is 30%. It's the discount that protects you if your estimate turns out to be too optimistic.
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Short answer
Margin of safety = (intrinsic value - price) / intrinsic value x 100. It's the discount to fair value. Graham wanted it large, often 30-50% - precisely because your intrinsic-value estimate could be wrong.
Step by step
2. Get the market price
The current share price: the denominator's counterpart and what you'd actually pay.
3. Take the difference
Intrinsic value minus market price = the absolute cushion per share.
4. Express it as a percent
Divide the cushion by intrinsic value, times 100. Graham looked for a large margin, often 30-50%.
Worked example
You estimate a company's intrinsic value at $100 per share. It trades at $70. Margin of safety = (100 − 70) / 100 x 100 = 30 percent.
That 30 percent is your error buffer. If your valuation was 15 percent too optimistic (the business is really worth $85) you still bought at $70, below the truer value. Buy at $98 with a 2 percent margin and the same error puts you underwater. The cushion is the whole point.
Margin of safety calculator
Enter your intrinsic-value estimate and the current market price.
Result-
Calculator runs entirely in your browser, so nothing is sent or stored. Educational only; not investment advice.
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Related
- What is margin of safety? - Graham's foundational concept, explained.
- What is intrinsic value? - the estimate the cushion is measured against.
- How to calculate intrinsic value - the DCF that produces the intrinsic-value input.
- What is the Graham-Fit Score? - the framework built around a margin of safety.
See the discount to fair value
invest-like grades valuation against the ten-year Treasury and peer multiples on every stock, a fast read on whether there's a cushion.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.