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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 MatchesMarginal rate of transformationMarginal rate of transformationThe 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 utilityMarginal utilityThe change in total satisfaction as a result of consuming one additional unit of a specific good or service. Marginal propensityMarginal propensityThe fraction of a change in income devoted to an activity, such as consumption, importing, or saving. See propensity. Gross profit marginGross profit marginGross profit divided by sales, which is equal to each sales dollar left over after paying for the cost of goods sold. Initial margin requirementInitial margin requirementWhen buying securities on margin, the proportion of the total market value of the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the Board of Governors of the Federal Reserve the responsibility to set initial margin requirements, but individual brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by the exchange. Further SuggestionsEffective margin (EM)Marginal propensity to import operating margin Margin requirement margin securities Margin security Margin account (stocks) Net profit margin Margin trading Marginal propensity to consume Margin requirement (options) Profit margin Margin Initial margin Marginal efficiency of capital Undermargined account Value marginal product gross margin margin call OTC margin stock Operating profit margin Buy on margin Profit margin Original margin margin |
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