Margin of Safety
The gap between the price you pay and your estimate of a stock's intrinsic value. Two framings are taught: (1) the first-order mechanic — (Intrinsic Value − Price) ÷ Intrinsic Value against your central estimate (see pfvi-11); (2) the disciplined form — the same formula run against a CONSERVATIVE estimate, the bear-end of your honest range rather than the central point (see pfvi-16). Graham's 33% discount rule and Buffett's bridge metaphor (build it for 30,000 pounds, only drive 10,000-pound trucks across) both refer to the disciplined form: the conservative-case margin is what protects you when your analysis is wrong or the world turns harsher.
Why it matters
The central concept of disciplined investing. No estimate of intrinsic value is perfectly accurate \u2014 the margin of safety protects you when your analysis is wrong, when the world turns out harsher than your bear case, and when the price falls further before recovering. Graham argued this was the most important concept in all of investing.
How to read it
Compute the simple discount to your central estimate first \u2014 but then re-run it against the conservative low end of your range; that conservative figure is the one the decision hangs on. Graham recommended buying at least 33% below intrinsic value for common stocks. For bonds, the margin comes from excess earning power over fixed charges. Buffett: "When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it."
Source
Graham, Benjamin. "The Intelligent Investor" (1949), Chapter 20.
Lessons that use this term
Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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