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Margin of safety |
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Margin of safetyThe 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 safetyWith 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 MatchesUnmargined accountUnmargined accountA cash account held at a brokerage firm. Marginal rate of substitutionMarginal rate of substitutionIn a production function or a utility function, the ratio at which one argument (input) substitutes for another along an isoquant or indifference curve. Marginal efficiency of capitalMarginal efficiency of capitalThe percentage yield earned on an additional unit of capital. Margin accountMargin accountAn account with a broker where a client is able to purchase securities on credit after margin has been deposited. Net profit marginNet profit marginNet income divided by sales; the amount of each sales dollar left over after all expenses have been paid. Further SuggestionsBuy on marginProfit margin Marginal tax rate Margin Gross profit margin Initial margin Effective margin (EM) Margin trading initial margin Marginal value product Marginal cost Marginal propensity to consume Marginal revenue Margin requirement (options) Margin account (stocks) operating margin Margin security Initial margin requirement Marginal propensity Marginal Marginal utility gross margin Marginal propensity to import marginal tax rate variation margin |
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