𝗧𝗵𝗲 𝗺𝗮𝗿𝗴𝗶𝗻 𝗼𝗳 𝗦𝗮𝗳𝗲𝘁𝘆 𝗲𝘅𝗽𝗹𝗮𝗶𝗻𝗲𝗱.
Suppose you are out shopping for an antique cabinet, how do you know that the dealer price is the right price?
You don't know unless you go see the prices for similar cabinets at other stores or what you think other people have paid for similar cabinets in the past.
If that cabinet is worth $1,000, and you see it at a store for $995, maybe it doesn't represent such a good deal for you. If you see it priced at a dealer for $800 or $700 or $600, maybe that is a better deal for you.
Why do you think it's a better deal; you might have been wrong in your analysis. You want to buy it at a price lower than what you think it's worth. That is your margin of safety.
So when we buy security, not only do we try to determine what the intrinsic value is, but we try to buy it at a low price versus its value, at a great margin of safety.
Buffett said it best when he said that the two most important rules to investing are, “Rule number one, don't lose money. Rule number two, see rule number one.”
When he said “lose money,” he didn’t mean you buy a stock at $20 and it goes to $15. He means if you buy a stock at $20 and you later find out it's only worth $15, that's what is to be avoided at all costs.
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Source: Paper by Abhay Deshpande.
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