Margin of safety
Buy well below what something is worth, and leave yourself a cushion.
In One Sentence
Take the value you estimate, subtract the price you actually pay, and what's left is your cushion in case your estimate is wrong.
Why It Matters
If you buy something worth NT$100 for NT$70, that NT$30 is your cushion in case you misjudged it; the deeper the discount, the bigger the cushion. I buy only the broad market, so I don't have to value every company, but the spirit is the same: the whole market's cushion is thickest when everyone is most afraid and rushing to sell. That's why I don't hoard cash waiting for that moment. Instead, when markets crash, I buy more with new income.
One Number
Buying the S&P 500 in January 2001, just after the bubble burst, earned about 4.4% a year over the next 15 years; buying in March 2003, near the bottom of the bear market, earned about 10.2%. Only two years apart, and the gap was nearly six percentage points (Shiller data · author's calculations · Chapter V).
In the Book
Chapter III presents it, alongside intrinsic value, as one of Graham's core ideas. The "Buying Low" section of Chapter V scales it up to look at the whole market.
Go Further
- Value vs. price Only by telling value from price can you measure the gap between them.
- Benjamin Graham This is one of his core ideas.
- Mr. Market He's most likely to hand you bargains when he's at his gloomiest.
- Defensive investing Marks's "margin for error" is the same idea.
- Buying in crashes Adding more in a crash is putting this cushion to use.