Margin of safety
The discount between what you think a business is worth and what the market is charging for it. The bigger the discount, the more room for error in your assessment.
The idea
Suppose you estimate a fair value of ₹500 per share for a company. The stock trades at:
- ₹500 - zero margin of safety. If any of your assumptions is wrong, you lose money.
- ₹350 - 30% margin of safety. The price gives you 30% cushion against being wrong about growth, margin, or governance.
- ₹250 - 50% margin of safety. Even if your estimate is materially off, you have meaningful protection.
The future is uncertain. Margin of safety is the discipline of acknowledging that uncertainty and only buying when the price compensates you for it.
Why this matters more for retail investors
A professional analyst tracks 30 companies daily, can sell quickly when news breaks, and is paid to be right on average. A retail investor:
- Researches a company once before buying and rarely revisits
- Holds for 3-5+ years, through cycles
- Can't easily exit a losing position emotionally