Margin of safety (safety margin) is the difference between the intrinsic value of a stock (i.e. value based on stock valuation and what the company is actually worth) and the price that the market sets on a stock (i.e. stock price is a matter of market participants' opinions and is different from the intrinsic value). There are several methods used to value companies and their stocks. ...
History
Benjamin Graham, the father of Value Investing, coined the term Margin of Safety in his book The Intelligent Investor. Graham said that "the margin of safety is always dependent on the price paid" (The Intelligent Investor, Benjamin Graham, HarperBusiness Essentials, 2003). This article is about a British economist. ...
Application to Investing
Using margin of safety principle, one should buy a stock when its worth is more than its price on the market. This is the central thesis of Value Investing philosophy which espouses preservation of capital as its first rule of investing. Benjamin Graham suggested to look at unpopular or neglected companies with low P/E and P/Book ratios. One should also analyze financial statements and footnotes to understand whether companies have hidden or unobvious assets (i.e. investments in other companies) that are potentially unnoticed by the market.
Warren Buffet, possibly the most famous investor today, was Benjamin Graham's student at Columbia and once said that "the three most important words of investing are 'margin of safety'." Warren Edward Buffett (born August 30, 1930) is a wealthy American investor and businessman. ...
Also, "Margin of Safety" is a name of an excellent book written by Seth A. Klarman, a successful value investor and President of the Baupost Group, an investment firm in Boston. This book is no longer published and sometimes can be found on eBay for more than $1000 (some consider it a collectible item).
Factor of safety (FoS), also known as Safety Factor, is a multiplier applied to the calculated maximum load (force, torque, bending moment or a combination) to which a component or assembly will be subjected.
Prime considerations are the accuracy of load and wear estimates, the consequences of failure, and the cost of overengineering the component to achieve that factor of safety.
This low safety factor is why aerospace parts and materials are subject to more stringent testing and quality control.
The margin of safety for the principal of a mortgage bond issue is the excess of value of mortgaged property, or value of the remaining equity if subject to prior lien issues, over the par value of the amount outstanding.
The term margin of safety as a measure of the degree of protection afforded the principal sum invested in stocks seems never to have been used, since the value of stocks is usually thought to be dependent wholly on earnings available for such stocks as to bonds or any other form of debt.
Similarly, the margin of safety for the par amount of common stock outstanding would be the excess of the net tangible assets over the combined preferred and common stocks outstanding, e.g., $50,000 or 50%.
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