Margin Of Safety - The Cornerstone To Successful Investing

Warren Buffett calls margin of safety the 'cornerstone of investment success'. The idea is to work out what you think a stock may be worth and only invest if the purchase price is significantly lower than your calculation of value. [This video is a short extract from a Udemy course Mental Models For Wall Street.] Mental Models For Wall Street: http://udemy.com/mental-models-for-wall-street My website: http://jbmarwood.com Free course here: http://jbmarwood.com/hacking-financial-markets-offer/ This gives you a cushion to allow for human error, bad luck, or unpredictable volatility. For example, it makes no sense to buy a stock for $60 that you think is only worth $62. That only gives a very small margin of safety ( and consequently a large margin for error. Much better to find a stock where the margin of safety is 30%, 50% or even more. For another example, let’s say you like Apple and you calculate that Apple stock is worth around $130 a share. And let’s say that the current market price is $111. To achieve a 30% margin of safety, you need the stock to drop to $91 before you can think about buying it. For a 50% margin, you need the stock to drop to $65 a share. So, as you can see. Even though you think the stock is currently trading below its true intrinsic value, you’re not going to buy it until it’s on offer at a much bigger bargain. If you can learn to apply the concept of margin of safety to all of your investment decisions you’re going to be limiting your potential downside, limiting your risk and giving yourself much more room for upside.

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