Margin of Safety
Updated 2026-08-15
INTRODUCTION
English translation pending.
CORE DEFINITION
Introduced by Benjamin Graham in value investing and used widely in engineering, the margin of safety is the gap between an asset's estimated intrinsic value and the price paid for it, or more generally the buffer between expected conditions and the limit a system can withstand. Buying well below estimated value protects the investor from errors in the estimate and from unforeseen events. The qualification is that a low price alone is not a margin, since a cheap asset may simply be worth less than assumed.
SCAFFOLDING EFFECT
Reduce cognitive load
- Use Value Gap: compare the estimated worth with the price and require a wide gap before acting. - Use Error Buffer: size the margin to the confidence you have in your own estimate.
Anchor fast decisions
Every valuation rests on assumptions that will be partly wrong, and the direction of the error cannot be known in advance. A gap between price and estimated value absorbs that error, so the decision can still work out if the estimate proves optimistic, which shifts the odds in the decision-maker's favour.
MINIMUM ACTION
In progress 0/1Practice this model in one real situation:
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Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/Factor_of_safety#Margin_of_safetyverified
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