What is Margin of Safety?
The discount between a stock's market price and its estimated intrinsic value.
Formal Definition
Coined by Benjamin Graham, the margin of safety is the buffer that protects an investor when an estimate of intrinsic value proves too optimistic. The larger the discount to fair value at purchase, the lower the risk of permanent capital loss. It is the central risk-control principle of value investing.
In Simple Terms
It is the cushion you build in by paying well below what you think something is worth, so that even if you are wrong you are unlikely to lose much. Like buying a $100 item for $60.
Example
Buying a stock at $60 that you estimate is worth $100 gives you a 40% margin of safety.