Chapter 18 · Day 18 — Intrinsic value: DCF, DDM and relative methods
Margin of safety
The discipline that turns an uncertain estimate into a usable decision.
22 of 30 · 8 min
Margin of Safety = (Intrinsic value − Market price) ÷ Intrinsic value × 100.
Intrinsic value Rs 500, market price Rs 350: (500 − 350) ÷ 500 × 100 = 30%. The price could be 30% better than your estimate before you have overpaid.
| Situation | Margin of safety needed |
|---|---|
| Stable, predictable, low debt | Smaller |
| Cyclical or heavily levered | Larger |
| Estimate rests on a long forecast | Larger |
| Sector you know poorly | Larger still |
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