Margin of safety

 

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Margin of safety

The term given by Benjamin Graham, 'the father of value investing', to the idea that if you buy shares for less than two thirds of their net asset value, you automatically have a cushion against any deterioration in the company's trading position in the future. Put another way, 'buy cheap'.Graham's view was that it is extremely difficult to accurately predict a company's future earnings. For an investment to be 'safe', therefore, he liked to see a margin between the value of its net current assets and its share price. If the share price was below the net current assets divided by the number of shares in issue, he would consider buying it.One of the problems with Graham's approach is that in bull markets it is very difficult to find companies that fulfil his criteria. A second problem is that many of the fastest growing companies in modern economies are those whose assets are intangible - for instance, the value of their intellectual property. Under the Graham rubric, these sorts of assets would be excluded.

Margin of safety

With respect to working capital management, the difference between (1) the amount of long-term financing and (2) the sum of fixed assets and the permanent component of current assets.



Margin of safety

Similar Matches

Profit margin

Profit margin

Indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percentage. Also known as net profit margin.


Undermargined account

Undermargined account

A margin account that no longer meets minimum maintenance requirements, requiring a margin call on the investor.


Marginal revenue product

Marginal revenue product

The additional revenue generated by the extra output from employing one more unit of a factor of production. In a competitive industry this equals the marginal value product, but with imperfect competition it is smaller, due to the implied price reduction. Determines factor prices in competitive factor markets.


Unmargined account

Unmargined account

A cash account held at a brokerage firm.


Marginal utility

Marginal utility

The change in total satisfaction as a result of consuming one additional unit of a specific good or service.


Further Suggestions

initial margin
Initial margin requirement
Marginal propensity to save
Marginal product
Margin requirement (options)
Operating profit margin
Marginal value product
Margin account (stocks)
Effective margin (EM)
Gross profit margin
operating margin
margin call
margin account
profit margin
Maintenance margin
Margin trading
Profit margin
Marginal rate of transformation
Initial margin
Marginal
Marginal tax rate
Original margin
Margin
Marginal cost
Marginal propensity


 
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