Dividend Investing Ideas Center
Have you ever wished for the safety of bonds, but the return potential...
Stoyan Bojinov Jun 04, 2015
According to the father of value investing, Benjamin Graham, if you were to distill the secret of sound investment into three words they would be “margin of safety”.
By Graham’s definition, margin of safety refers to the difference between a stock’s price and its intrinsic value; the greater the difference, the more “safety” you have when purchasing said security and vice versa. With this philosophy in mind, we highlight three other ways to think about, and quantify, the concept of margin of safety.
There’s no clear-cut definition of margin of safety because it all comes down to the individual’s risk preference and investing objectives. As such, it helps to think about this important concept with different perspectives in mind. Here are three different ways to consider thinking about margin of safety when analyzing your next purchase:
Before pulling the trigger on your next purchase, consider what your margin of safety is; that is, consider the yield, price performance, and payout ratio of a company and compare it to its peers so you have a clearer idea of where a particular stock stands on the margin of safety spectrum.
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