Lesson 06 — Margin of Safety
Week 02 · Lesson 6 of 7 · Week 02 — Foundations: Thinking Like a Long-term Investor
"Margin of safety — the three most important words in investing." — Benjamin Graham "Saste mein accha maal — yahi margin of safety hai." The gap between what...
The single most important investing concept
"Margin of safety — the three most important words in investing." — Benjamin Graham
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"Saste mein accha maal — yahi margin of safety hai."
What is Margin of Safety?
The gap between what you think a business is worth and what you pay for it.
Margin of Safety = Estimated Value − Purchase Price
If you think a stock is worth ₹100 based on fundamentals, you buy at ₹70. That ₹30 gap protects you if:
- Your valuation is slightly wrong
- Business hits a temporary slowdown
- Market sentiment turns negative
Why do you need it?
Because you will be wrong sometimes. Nobody can predict perfectly.
| Scenario | Without MoS | With MoS |
|---|---|---|
| Your valuation was right | Good return | Great return |
| Your valuation was slightly high | Small loss | Still okay |
| Business had a bad year | Bigger loss | Protected |
How much margin of safety?
A simple beginner rule:
| Company quality | Minimum MoS |
|---|---|
| High quality (consistent compounder) | 15-20% below fair value |
| Average quality | 30-40% below fair value |
| Turnaround / cyclical | 40-50% below fair value |
Practical wisdom
You don't need to calculate exact intrinsic value. Just ensure you're not overpaying. PE ratios, PB ratios, and earnings yield are simple starting checks (you'll learn these in Week 03-04).
Visual: Margin of Safety
Key takeaway
Never pay full price. Always leave room for being wrong. "Galti ki gunjaish rakhna zaroori hai."
Apply it
Look at any company's PE ratio on InvestingSamjho. Compare it to its 5-year average PE. If current PE is much higher, margin of safety is low.