The margin of safety principle is a fundamental part of value investing. Indeed, you could go so far as to say that without understanding this principle, it is not possible to follow a value strategy.
That being said, just by buying a stock that is trading below book value could qualify as buying with a margin of safety. However, as most experienced value investors will tell you, it is often not enough just to find the stocks trading below book value. Following this strategy can often lead you into value traps. There is usually a reason why stocks are trading below their book value per share and if you do not understand why, you could have a very negative surprise further down the line. Continue Reading »