Value Investment Research | Port Wren Capital | Margin of Safety is Investing: A Must

Margin of Safety in Investing: A Must

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Most likely, you’ve not heard the one about the Margin of Safety and the bridge before. But trust me, it is well worth knowing. The book, Margin of Safety, was published back in 1991 and is very highly sought out by thousands even today. However, it was only printed once and in a small volume compared to its lasting demand. You can find it on Amazon and Ebay where some are asking in the range of hundreds to thousands of dollars for one. Seth Klarman has been a fund manager since 1982 and averages about a 20% return per year. And his fund has been closed for some time now due to his success.

Seth Klarman is an excellent writer and covers the topics of: why most investors stumble, to what is value investing, and possible ways to find values in his book among others. The book provides many great concepts in value investing.

The concept of Margin of Safety (MOS) comes into play when researching a company to invest in as a value investor. You want to ensure the down-side possibilities has much as most people look at the upside. In other words, you want to win by not losing money. Similar to what Warren Buffet says, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” Another good point is that a Margin of Safety (MOS) is an approach that makes investing risk-averse. Thus, it’s a lot like insurance if you will. At Port Wren Capital, we also think of it in terms a Margin of Safety or of a spread. When searching for bargains in the stock market, you want to ensure that the price Mr. Market is selling it for is much lower than the estimated intrinsic value of the stock on a per share basis. For example, you want to find a stock that has an intrinsic value of say $32.00 while Mr. Market is selling for only $23.69 per share. Thus, you have a Margin of Safety (MOS) of over 35%. If it turns out that your estimated intrinsic value is a few dollars too high by say $2.00 per share. You still have a Margin of Safety (MOS) and have protected your capital. Some might recall Warren Buffet saying, “If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers you, you may fell okay, but if it’s over the Grand Canyon, you may feel you want a little larger Margin of Safety…” So, as a true investor as opposed to a speculator, you should always have a Margin of Safety (MOS) when conducting your research prior to making any stock investment. Using this approach, you are reducing the so called risk. And be sure you understand that there is a big difference between risk and uncertainly in the stock market. Often retail investors think they are the same, they are not. So, with a MOS you are taking the risk factor out of the equation. And you want to have the uncertainly in the stock market because that is one of the factors that often creates a undervalued stock which provides an opportunity for the value investor.

At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.

Published: 1/1/18

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