Give your investments the best chance of success by employing a ‘margin of safety’

Julie Brownlee, Fsp Invest, 05 Aug. 2014

Tags: margin of safety, what is a margin of safety, benjamin graham, value investing, investment strategy,

Investing is a risky business. But that’s exactly why people invest. They take on risk in the hope it pays off and they reap the rewards of a monetary gain.

When you invest, it makes perfect sense to try to reduce the risks you take on. One way of doing this is to make sure you have a ‘margin of safety’ when you invest.

So what is a margin of safety? And how can you apply it to your investment strategy?

Read on to find out…

What does margin of safety mean?

The father of value investing, Benjamin Graham, coined the term ‘margin of safety’. Benjamin Graham also takes the credit of being the most important mentor of investing great Warren Buffett, the fourth richest man in the world.

Margin of safety means you should only invest in something that you can buy for a lot less than it’s really worth.

The main reason behind this is that no-one knows what lies ahead in the financial markets. And market crashes do happen, the team of experts at Money Week explain.

So by buying something for a lot less than what you think it is worth, you’re likely to lose less money if the worst does happen.

The margin of safety is the difference between the ‘true’ value of the company and the share price you actually pay.

How big should your margin of safety be?

There’s isn’t a specific margin size you should aim for. But the bigger the better.

A minimum of 25%, or more, is a sensible starting point.

For example, you’ve done your research. Shares in Company ABC appear to be worth R10 each. You could base this on the company’s net assets. So you’d only look to buy shares if they trade below R7.

By giving yourself a good margin of safety, you reduce your risks. You increase the chance of making money and decrease the chance of losing money on your investment.

If you can’t find shares to invest in that give you this margin of safety, you shouldn’t invest. You should wait until the share price falls to a more attractive level.

So there you have it, how to give your investments the best chance of success by employing a margin of safety.

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It’s never too late to “rand-proof” your portfolio

The South African economy is struggling on the back of a wave of endless strikes… Your hard-earned rands are worth a fraction of what they were… And bonds, in our low-interest ‘stagflation’ economy just aren’t the prudent safe havens they once were.

But here’s the good news: You don’t have to be at the mercy of the South African Reserve Bank, JSE money jugglers and crapshoot stocks!

And here’s why…


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