Info 1: margin of safety definition
Info 2: how margin of safety works
Info 3: margin of safety vs discount factor
Info 4: example of margin of safety
Opening information:
The margin of safety occupied two matters margin and safety. Margin means line or mark, and safety means protection. The margin of safety means a protection mark.
So now let’s have a look at what is a margin of safety, how the margin of safety works in the public market among Corporate Industries, and what is the difference between the margin of safety and vs discount factor, finally one clear example of the margin of safety.
Info 1: margin of safety definition
Mr. Gilion is the one who mostly purchased the cars second-hand and sold them to other people for more than the real purchase price of the car.
Gilion is a talented man who calculates the accurate worth of each part of the car, he could find the natural worth of any car bought under such car worth at any offered price but not more than a car’s worth.
Next, Mr. Markue is also the person who bought the bikes second-hand and sold them for the flipping profits.
He also likes Gilion, because he was to calculate the near worth of the bike but not the accurate worth of the Gilion. Markue never purchased a second-hand bike above the worth or intrinsic value its the bike.
Here the market and millions who purchased the bike and car under the real worth of the car despite buying the car for market price is called as margin of safety. So now let’s dive into how the margin of safety works.
Info 2: how margin of safety works
The margin of safety doesn’t represent any of the specific things or objects, instead, they are protection lines for purchasing certain public securities at determined prices.
Therefore any of the investments that are made with protection lines with calculated marked market prices, then such thing is considered as a margin of safety.
But there is no single scientific evidence that purchasing one public security at a certain price would be the margin of safety, based on on our understanding and calculation of one business or securities worth purchasing one security at a particular price we are concluding one price is the margin of safety price for specific stock or debt instruments.
Supposedly if the purchase for the one Investment of security is not made by the calculation of finding a rights pitch to buy such stock at the protection price of margin of safety, then such purchase is not called as a margin of safety.
The protection price is buying any of the stock or any Kind of public securities under the real natural value or intrinsic value at any amount of discounted price is demonstrated as a margin of safety.
This means if the investor buys any securities at an equal price for the Intrinsic value or above then an intrinsic value isn’t elaborated as a margin of safety on the one Investment or trade.
Moreover margin of safety doesn’t mean the price of purchased stock wouldn’t go down, it will go down, but what makes sure that it is a temporary down on the market because of high volatility from the supply and demand of one stock.
Each of the Investors purchased with a margin of safety at a different market price, because each of the investors purchased with a distinct discount factor.
Most people’s confuse about the margin of safety and discount factor, So now let’s jump into the key difference in it anyway.
Info 3: intrinsic value vs discount factor
If any of the person purchase the security under 50 percent of the intrinsic value and another person purchases the same securities for a different price 30 percent under the intrinsic value are the two prices.
These two prices are named as the margin of safety because any prices that are purchased under the intrinsic value are introduced as the margin of safety amount.
On the other side, the discount factor is the method of calculation which are used to find the discount amount of the one security price by how far certain Investors purchased under the one intrinsic value. And also used to calculate what market price specific Investors need to purchase to get the expected discount rate.
To make you more clear about the margin of safety, let’s look into one brief example below.
Info 4: example of margin of safety
Say you’re the one who looks to invest in a wonderful company by finding attractive stock and the expected margin of safety.
Imagine that you had found Stock G and you analyze the company G and arrive at the price of 64 dollars as intrinsic value.
At the market price of stock G is trading at 60 dollars and you’re looking to buy the stock 50 percent discount which means 32 dollars.
Here the discount factor is 50 percent and the margin of safety is 32 dollars.