I have just read the comments below from the biggest mouth in i3investor
[Posted by qqq3 > Jan 28, 2019 07:56 PM | Report Abuse https://cdn1.i3investor.com/cm/icon/trans16.gif
kc...there are no accounting margin of safety...its a delusion.
There are only two kinds of safety....
1 learn to say NO....
2 good sense of timing.....
using NTA and PE as margin of safety is a delusion.....]
One can see how naive and ignorant is the commentator above who thinks that he is the greatest investor around. If I were him, and do not understand what Margin of safety, MOS, is, I would just keep quiet, as then nobody will know I am that ignorant and stupid.
Just what is margin of safety, MOS, in investing?
MOS was popularized by Benjamin Graham, the father of value investing decades ago. Graham’s MOS is the difference between a stock’s price and its intrinsic value. In theory, the further a stock’s price is below its intrinsic value, the greater the margin of safety against future uncertainty and the greater the stock’s resiliency to market downturns.
“If you were to distil the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.” Benjamin Graham
Graham’s most famous disciple, Warren Buffett, had something to say about MOS in his speech during the Berkshire Hathaway Annual Meeting in 1996,
"On the margin of safety, which means, don't try and drive a 9,800-pound truck over a bridge that says it's, you know, capacity: 10,000 pounds. But go down the road a little bit and find one that says, capacity: 15,000 pounds."
When Buffett analyzes a prospective investment, he wants the value at his entry price to be much lower than his value estimate for the company. The difference between the two figures is his MOS which limits the size of losses in case there are errors in his business analysis or assumptions.
Buffett’s right-hand man Charles Munger also said a piece about MOS,
"The margin of safety concept boils down to getting more value than you're paying,"
Both Buffett and Munger are billionaires in USD term, result from investing in the stock market. They have also created many other multi-millionaires from their investors.
Investment legend Seth Klarmen, is a hedge fund manager who runs Boston-based firm Baupost. With $32 billion under management, Baupost is one of the largest hedge funds. He is worth $1.5 billion USD, all from investing in the stock market. He has also made many multi-millionaires for his investors.
Seth Klarman is seen as an expert in value investing. His book, exactly named "Margin of Safety," a cult classic among investors, sells for as much as $3,000 on Amazon.
A few quotes from Seth Klarmen on MOS in his book.
“A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.”
“By always buying at a significant discount to underlying business value, and giving preference to tangible assets over intangibles. (This does not mean that there are not excellent investment opportunities in businesses with valuable intangible assets.)… Since investors cannot predict when values will rise or fall, valuation should always be performed conservatively, giving considerable weight to worst-case liquidation value as well as to other methods.”
“A margin of safety is [is intended to] allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.”
Mohnish Pabrai founded Pabrai Investment Funds in 1999. His long-only equity fund has returned a cumulative 517% net for investors versus 43% for the S&P 500 Index since the fund's inception in 2000. Outperforming the S&P 500 by 1103% from its inception through 2013, Pabrai quickly became one of the most recognized value investors in the world. This is what he has said about MOS,
“The idea is that you buy things at a significant discount to what their underlying value is, so that in the event that either bad things happen or you made some mistake in your calculations, you have some fallback so you do not lose money. There is also another aspect to margin of safety, that is that the greater the discount to intrinsic value that you are paying you get two things downside protection and upside.”
The concept of MOS is used by almost all the successful super investors in the world. Some may not use it, but yet they just keep quiet as they know it is a plausible, logical and proven successful concept in investing.
Yes, estimation of the value of a stock is an art as well as a science. There is no guarantee that your estimation is correct. But then without an estimation of the value, how much are you willing to pay for it?
Buying something at a price way below its estimated value. Do I need to elaborate more about that?
“Investing success is not about buying something good, but from buying something well” Howard Marks
KC Chong @email@example.com