Investing term
What is Margin of safety?
The discount you demand below your fair-value estimate, so you can be wrong and still not lose.
Margin of safety is the discount you insist on below your estimate of a stock's fair value before buying — a buffer that protects you when, not if, your estimate turns out too optimistic. If you think a stock is worth $60, you might only buy at $40, giving a one-third cushion against being wrong.
It's the core principle of value investing, introduced by Benjamin Graham, and it exists precisely because valuation is uncertain. Estimates of intrinsic value rest on assumptions about the future that are often wrong, so buying only when the price is comfortably below your estimate means that even if the business turns out worse than you thought, you can still avoid a loss — or at least limit it. The wider the margin, the more room for error. It reframes investing around humility: not 'am I right?' but 'what if I'm wrong — will I still be protected?'
Margin of safety is the discount you demand below your fair-value estimate — buy at $40 what you think is worth $60. The buffer protects you when your estimate proves too optimistic.
For example
You estimate a stock's fair value at $60 but only buy at $40 — a 33% margin of safety, so even if your estimate proves 20% too high, you've still paid below the real worth.
Learn it by doing
That's Margin of safety in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 15, Valuation for Investors).
Try the free lesson →Why it matters to you
Margin of safety matters because it's the practical answer to valuation's inescapable uncertainty. Since no estimate of a business's worth is precise, demanding a discount before buying builds in protection against errors, bad luck, and unforeseen problems. It turns being wrong from a disaster into a survivable setback, and it's what separates disciplined value investing from optimistic price-guessing. The bigger the uncertainty, the wider the margin you should demand.
⚠ Skipping the margin when you're confident
The temptation is to abandon the margin of safety when you feel sure about a stock — paying close to your fair-value estimate because you're convinced you're right. But confidence is exactly when overconfidence bites, and the margin exists for the times your estimate is wrong. Insisting on a discount even when certain is the discipline; buying at full estimated value leaves no room for the errors that inevitably occur.