Margin of Safety — what is it?

What is margin of safety?

Margin of safety is a concept introduced by Benjamin Graham — the father of value investing. It refers to the difference between an asset's intrinsic value and its market price. The larger the difference in the investor's favor, the greater the margin of safety.

Principle: buy only when the price is significantly below the estimated intrinsic value.

Why is margin of safety important?

1. Protects against valuation errors — every valuation is an estimate, not certainty
2. Guards against unforeseen events — recession, pandemic, regulatory changes
3. Increases potential profit — you buy cheap, profit is higher when price returns to intrinsic value
4. Reduces loss risk — if you bought with a 30% discount, the market must fall over 30% before you incur a real loss

Example

You analyze a company and estimate its intrinsic value at 100 PLN per share.

• Market price 95 PLN — 5% margin of safety → too small
• Market price 70 PLN — 30% margin of safety → attractive opportunity
• Market price 110 PLN — no margin → don't buy

Graham recommended a minimum 33% margin of safety. Buffett is more flexible but also requires a significant discount.

How to calculate margin of safety?

Formula: Margin = (Intrinsic value - Market price) / Intrinsic value × 100%

Problem: how to calculate intrinsic value? Main methods:

• DCF (Discounted Cash Flow) — discounted cash flows
• Ratios — P/E, P/B, EV/EBITDA compared to industry average
• Net asset value — what the company's assets are worth after subtracting debts

Margin of safety beyond the stock market

The concept applies everywhere:

• Emergency fund — margin of safety in personal budget
• Mortgage — payment below 30% of income = margin in case of job loss
• Retirement planning — assume lower return rate than historical average

How Freenance can help

Freenance helps track asset valuations in your portfolio and compare them to purchase prices. You can see which positions you bought at a discount and which are overvalued — and make rebalancing decisions with margin of safety in mind.

👉 Invest with margin of safety with Freenance — freenance.io