Margin Of Safety

Value investing was first introduced by Ben Graham & David Dodd during their lectures in Columbia Business School in 1928. It was later formulated in the all-time Business Classics 'Security Analysis' and 'The Intelligent Investor'.

The main idea is to do some fundamental securities analysis to find shares that are under priced, meaning trading at price lower than their Net Asset Value.

Graham first introduced the term 'Margin of Safety'. Margin of Safety put simply means buying stocks trading below their tangible book value. This will offer protection to the investor, during the inherent variability and fluctuation of the market. Graham noticed that the market fluctuates continuously and many times violently. Even the best investor cannot know these fluctuations in order to be protected. His only hope is to buy his shares at as low price as possible, and actually at a value less than what a company is worth.

The idea is that if you buy a stock trading below its tangible book value, however violent the market fluctuations are, it will eventually trade at a fair price. A fair price can be the Net Asset Value, or higher depending on various other factors. But if you buy the stock at a high price, you may fall into a downward market before being able to sell it, and can take years to break even.

Put simple: 'The less you pay, the less is your possible loss'