A margin of safety means buying an asset below its estimated intrinsic value. The price gap provides a cushion when valuation estimates are wrong or adverse outcomes occur. section 7.3.2
Use the technique by:
- Focusing on businesses you understand, so risks and opportunities are easier to assess. section 7.3.2
- Applying fundamental analysis to identify companies whose market prices appear below intrinsic value. section 7.3.2
Engineering analogy
An application expected to handle 100 peak-load requests should be built above that exact capacity. Designing for precisely 100 leaves no cushion for unexpected surges; investing without a margin of safety creates the same fragility. Likewise, buying ACME at $100 while expecting $120 exposes the investor to a loss if the price falls to $80. section 7.3.2
