Intelligent Investor Chapter 20 Summary : Margin of safety as the central concept of investment

Margin of safety as the central concept of investment

  • If the secret of sound investment had to be summed up, then it's - "Margin of Safety".
  • Past ability to earn in excess that protects investor against loss in the event of future decline. or The percentage by which revenues/profits may decline before balance after profits disappears. 
  • Can't project past and expect same in future. Cant rely on judgement of future earnings. But if doing these, one should measure margin in terms of carefully projected income record instead of margin shown in past.
  • For bonds, comparing total value of enterprise with debt and average market price of common stocks over a period of years=> margin of enterprise value over debt and margin of earnings over prices.
  • During depression period, for common stock selling at a price less than that of bonds, common stocks that could be safely issued against it's earning power(E/P). If companies have strong financial conditions, then margin of safety with bond+ chances of larger income + principal appreciation.
  • Ordinary conditions, Expected earning power considerably above the bond yield.
  • Over 10 years, typical excess of stock earning power over bond interest may aggregate 50% of price paid(old edition year-long back).
  • Diversification maximizes favorable results.
  • Margin of safety is the difference between the percentage of earnings on the stocks at the price you pay for it and the rate of interest o bonds. This is the difference that would absorb unsatisfactory developments.
  • Losses mainly arise from the purchase of low quality issues in favorable conditions. Prosperity is not safety and doesn't show earning power.
  • Coverage of interest rates and preferred dividends must be tested over a number of years.
  • For growth stocks, substitute the past record with expect earnings(based on conservative calculation). Diversification is very crucial.
  • For bargain issues, difference between price and appraised value.
  • True margin of safety can only be demonstrated by figures, persuasive reasoning and experience.
  • Conventional-US Govt issues, high grade dividend paying common stocks, state and municipal tax-exempt bonds, first quality corporate bonds with yields better than that of US Savings bonds.
  • Unconventional-undervalued common stocks of secondary companies(<=2/3 * appraised value), medium grade corporate bonds and preferred stocks selling at discount,special situations. Sufficiently low prices can make sound investment if the investor can analyze well and diversify.
  • Investment is most intelligent when it is most businesslike.
    • Know what you are doing - know your business.
    • Don't let anyone run your business, unless performance can be supervised and unless you have strong reasons for placing confidence in his integrity.
    • Don't enter upon a operation unless a reliable calculation shows that it has a fair chance to yield a reasonable profit.
    • Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgement is sound, act on it - even though others may hesitate or differ.


  • First, don't lose. Margin of error will help.
  • Good decision- well calibrated confidence and correctly anticipated regret. Risk has equal doses of probabilities and consequences - probability of being right and consequences when wrong. In uncertain conditions, consequences must dominate probabilities. 


See Intelligent Investor Summary for other chapters summary.


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