Margin of Safety
Benjamin Graham's most important idea, in plain English.
Pay 60 cents for a dollar of value and you can be wrong about a lot and still come out fine. That gap — between what something is worth and what it costs — is the margin of safety.
"The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future."— Benjamin Graham, The Intelligent Investor
Why it matters
Every valuation is wrong. We don't know what earnings will be next year, let alone in 2034. A margin of safety acknowledges that — it's a buffer for forecast error, multiple compression, recessions, management mistakes, and plain bad luck.
Buy a business at fair value and you need everything to go right. Buy it at a 30-40% discount to fair value and most of the work is done for you. The cheaper you pay, the less the future has to cooperate.
How MOATEY measures it
Our valuation score is based on a discounted cash flow model — sometimes earnings-based, sometimes free-cash-flow-based — to estimate intrinsic value. For banks we use a dedicated bank valuation model. The bigger the gap between price and intrinsic value, the higher the score.
Price above intrinsic value. Low score.
Price close to intrinsic value.
Price meaningfully below intrinsic value.
Important caveat
A margin of safety on a bad business is a value trap. Cheap-and-deteriorating beats expensive, but it loses to fair-and-compounding over a decade. That's why MOATEY always combines fundamentals and valuation — quality and price together, neither more important than the other.