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

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Marginal rate of transformation

Marginal rate of transformation

The increase in output of one good made possible by a one-unit decrease in the output of another, given the technology and factor endowments of a country; thus the absolute value of the slope of the transformation curve.


Marginal tax rate

Marginal tax rate

The tax rate that would have to be paid on any additional dollars of taxable income earned.


Maintenance margin

Maintenance margin

The dollar amount required to be kept at the OCC throughout the life of an option OCC; percentage of the dollar amount of OCC that must always be kept as OCC.


Operating profit margin

Operating profit margin

The ratio of operating profit to net sales.


Effective margin (EM)

Effective margin (EM)

Used with SAT performance measures, the amount equal to the net earned spread, or margin of income, on assets in excess of financing costs for a given interest rate and prepayment rate scenario.


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