Margin of safety protects investors from losses from "summary" of The Little Book of Value Investing by Christopher H. Browne
Margin of safety is a fundamental concept that lies at the heart of value investing. Essentially, it is a cushion that protects investors from potential losses. By buying a stock at a significant discount to its intrinsic value, investors create a margin of safety that provides a buffer against unforeseen risks or market fluctuations. This principle is based on the idea that the lower the price paid for an investment relative to its true worth, the less downside risk there is for the investor. Imagine you are buying a house. You would want to negotiate a price below the market value to account for any hidden defects or unforeseen expenses that may arise. The same concept applies to investing in stocks. By purchasing shares at a price below their intrinsic value, investors are essentially building a margin of safety into their investment. This margin of safety not only protects investors from potential losses but also enhances their potential for long-term gains. I...
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