A concept wherein an investor only buys a stock when its current market price is below its intrinsic value. These investors believe a stock has a certain price that is right when it is neither over- nor under-valued.
By investing only in stocks that offer a margin of safety, investors try to increase their chances of earning decent returns.
How would you know whether a stock offers a margin of safety?
Some investors use the discounted cash flow approach to calculate intrinsic value of a stock, and then compare it with the current price. Others make use of relative valuation approaches. They compare the current price-to-earnings ratio (P/E) or price-to-book value (P/BV) of the stock with long-term averages, or compare the PE or P/BV of a stock with that of peers to decide if it offers a margin of safety.
By investing only in stocks that offer a margin of safety, investors try to increase their chances of earning decent returns.
How would you know whether a stock offers a margin of safety?
Some investors use the discounted cash flow approach to calculate intrinsic value of a stock, and then compare it with the current price. Others make use of relative valuation approaches. They compare the current price-to-earnings ratio (P/E) or price-to-book value (P/BV) of the stock with long-term averages, or compare the PE or P/BV of a stock with that of peers to decide if it offers a margin of safety.
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