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

Margin requirement (options)

Margin requirement (options)

The amount of cash an uncovered (naked) option writer is required to deposit and maintain to cover his daily position valuation and reasonably foreseeable intraday price changes.


Marginal cost

Marginal cost

The increase in cost that accompanies a unit increase in output; the partial derivative of the cost function with respect to output.


Marginal revenue

Marginal revenue

The change in total revenue as a result of producing one additional unit of output.


Value marginal product

Value marginal product

Marginal value product.


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.


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