What constitutes the right margin of safety when buying stocks?
What It Is
Let’s quote a reputable source for the definition.
Namely, if the price of a stock is below what I would consider its “real value”, the difference is considered a margin of safety. When and if others in the market recognize the stock’s appropriate value, then, it is assumed, the price would rise to meet that value. And if I purchased when it was at that lower point, I would have a gain.
There are of course, many sides to every issue. And everyone’s definition of what the appropriate, real, or intrinsic, value will different based on whatever criteria they use. Therefore there is no standard that everyone can use to determine intrinsic value, nor is there a standard everyone can use to measure what is an appropriate margin of safety. As a result, since everything is subjective, it comes down to trusting one’s gut.
Lots of statistics can be thrown around to bolster opinions and ideas. That’s a given. And hindsight is always 20-20. The future will not abide by anyone’s calculations or formulas. Believability and force of personality matter not at all to stock prices.
While there is always something new on the horizon, and everyone seems to be chasing the latest “new new thing”, sticking to the basics is where one can find comfort and success.
There two other time-tested truths that can provide guidance.
Time in the market beats timing the market. This means that frequent trading reduces gains. Minimize trading.
On The Other Hand
We hear that Warren Buffett said “our favorite holding period is forever.” Of course these are nice words. But forever is only sometimes for some stocks. Berkshire Hathaway sells (and buys) millions of shares of stock in numerous companies on a regular basis. Should this impact us?
It depends on what each of us consider appropriate for our investment decisions. I do not follow or want to mimic Warren Buffett or anyone else. Sometimes I like to read the investment plans of others, but for my own comfort and perspective, I make my own bets.
Live Below One’s Means. This means spend less than one earns. Save and invest that saved money. There is no alternative way.
On The Other Hand
There is no joy in excessive parsimoniousness. While saving and investing are critical, excessive tightfistedness is self-defeating. For example, read the story of Hetty Green.
There is no pleasure in denying oneself basic and regular necessities. So being suitable frugal is appropriate, miserliness loves misery. And misery is optional.
Where is your margin of safety? Let me know here.
The page of punctuation is from the “A Pickle for the Knowing Ones,” published in 1797, by Timothy Dexter. The first edition of his book contained no punctuation, so in subsequent editions he added a page of punctuation. Courtesy University of California Libraries.
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