Margin of Safety

If you had asked Benjamin Graham to distill the secret of sound investing into three words, he might have replied, "margin of safety." Those are still the right three words and will remain so for as long as humans are unable to accurately predict the future.

Why?

As Graham repeatedly warned, any estimate of intrinsic value is based on numerous assumptions about the future, which are unlikely to be completely accurate. By allowing yourself a margin of safety—paying only $60 for a stock you think is worth $100, for example—you provide for errors in your forecasts and unforeseeable events that may alter the business landscape.

Just think, if you were asked to build a bridge over which 10,000-pound trucks were to pass, would you build it to hold exactly 10,000 pounds? Of course not—you'd build the bridge to hold 15,000 or 20,000 pounds. That is your margin of safety.