Margin of Safety

Margin of safety is the gap between an asset’s intrinsic value and its price — your cushion against error.

How investors use it

Before any purchase, write down your estimate of worth and require a gap of 20–30% or more before acting. When no gap exists, waiting is a position — cash is a legitimate holding.

Worked example

A real-world scenario

In 2008, a bank’s stock fell from $80 to $30. A value investor estimates the franchise is worth $60 and buys at $35 — a healthy margin of safety. The financial crisis deepens, the bank’s assets lose value, and the intrinsic estimate is revised down to $25. The stock falls to $20. The margin of safety did not prevent the loss; it made it survivable — a 40% loss instead of a wipeout, in a position sized accordingly. The scenario is what the cushion is for: not avoiding all pain, but absorbing the pain of being partly wrong.

Common confusion

A bigger gap protects you when your estimate or the future is wrong.

Why it matters

It is the core rule of conservative investing: buy well below worth.

Key takeaway

Margin of safety is the cushion between your estimate of worth and the price you pay, and it is the insurance against being wrong about the numbers or the future. Buy well below your estimate and mistakes become survivable; buy at the price and the smallest error puts you underwater. The less certain the estimate, the bigger the required discount, and waiting when no gap exists is itself a position. Cash is a legitimate holding; overpaying is not.

Definitions reviewed by the Investing Glossary editorial team.