Monday, 1 June 2015

How Safe Are You?

"Margin of Safety" - The Three Most Important Words In Investing

Imagine that you're being tasked to build a bridge and the maximum weight that it should be able to hold at any one point is 10000kg - Would you build a bridge that can support 10000kg or a bridge that can support 15000kg? I bet you would choose the latter and the reason for it is probably because it is "safer".

This is known as the "Margin of Safety" and the concept can be applied to investing as well.

What I am actively seeking out for is a minimum margin of at least 30%. This means that in order for me to purchase shares in the company, the company must be trading at below 30% of it's calculated true worth. The "margin of safety" allows me to make errors in my calculations, mitigating downside risks and yet at the same time, increases my rate of return if I am right in my estimations. Truly, this is a concept that allows us to experience the best of both worlds!


A point to note - having a "margin of safety" does not ensure that all your investments will be successful but rather, it increases the likelihood of doing well because it takes into account mistakes in our judgement.

Please leave your comments to let me know where I can improve on :) as well as any topics anyone of you would like to find out more about in investing!!

Journey to Financial Freedom,

1 comment:

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