Margin of safety is the gap between a stock's estimated intrinsic value and the price you pay for it, expressed as a percentage. It is the cushion that protects an investor if their valuation proves too optimistic. The concept, central to value investing, was popularised by Benjamin Graham.
Worked example
If a stock's intrinsic value is estimated at $100 and you buy at $70, your margin of safety is (100 − 70) ÷ 100 = 30%.
Why it matters
A margin of safety acknowledges that every valuation involves uncertainty. Buying well below your estimate of value reduces the damage from forecasting errors and bad luck. Graham often looked for discounts of a third or more.
Frequently asked questions
There is no fixed rule, but many value investors look for a discount of at least 20%–30% to intrinsic value, with larger buffers for riskier or harder-to-forecast businesses.