Margin of Safety

Imagine you are an engineer designing a bridge. The bridge needs to hold ten thousand kilograms. You do not design it to hold exactly ten thousand. You design it to hold thirty thousand. That extra twenty thousand kilograms of capacity is your margin of safety. It accounts for everything you cannot predict. A heavier than expected truck. Rust weakening a beam over time. A windstorm that adds lateral force. You do not know which problem will arrive. You just know that something will, and when it does, the bridge must not collapse. Benjamin Graham, the father of value investing and Warren Buffett's mentor, took this engineering concept and applied it to buying stocks. If you calculate that a company is worth a hundred dollars per share, you do not buy it at a hundred. You buy it at sixty or seventy. That gap between what you believe it is worth and what you pay for it is your margin of safety.