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Vitaliy Katsenelson
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The 6 Commandments of Value Investing No. 4 - Margin of Safety: Leave Room in Your Buy Price for Being Wrong

Margin of safety is a function of two dimensions: a company’s quality and its growth.

May 09, 2018 | About:

Margin of safety is a function of two dimensions: a company’s quality and its growth.

I am generalizing here, but exogenous events have a greater impact on a lower-quality business than a higher-quality one. Thus a high-quality company needs a lower margin of safety than a lower-quality one.

A company that is growing earnings and paying dividends has time on its side and thus may not need as much margin of safety as a lower-growing one.

We quantify both a company’s quality and growth, and thus margin of safety is deeply embedded in our investment operating system.

The larger discount to the stock’s fair value (the $1), the less clairvoyance you need to have about the future of the business. For instance, in 2013, when Apple (NASDAQ:AAPL) stock was trading at $400 (pre-split) we didn’t have to have a very clear crystal ball about Apple’s future; Apple just had to be able to barely fog the mirror. In later years, at $900, we need to have a lot more precision in our analysis of Apple’s future.

I am the CIO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.)

I wrote two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (Polish is one of them – go figure.)

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.” (They must have been impressed by the eloquence of the Polish translation.)



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