Margin of Safety

Margin of safety is the gap between an estimate of what a share is worth and the price paid for it, kept as a buffer against the estimate being wrong. Benjamin Graham built his method around it: buy only when the price sits well below the value you worked out, so that a mistake in the work does not have to cost money.

It is quoted two ways, and they give different numbers for the same stock. Measured against the estimate, as Graham framed it, the margin is (value - price) / value. Measured against the price, the way our fair-value tool prints it, it is (value - price) / price, which always reads larger when the price is below the estimate. A 200 USD estimate and a 150 USD price is a 25% margin one way and 33.3% the other.

The margin is only as good as the estimate under it. When one point on the discount rate moves the estimate by 15-20%, a 20% margin can disappear inside a single assumption, so read the margin next to the inputs that produced it.