GO FOR MARGIN OF SAFETY
“It’s far better to buy a wonderful company
at a fair price than a fair company at a wonderful price
WARREN BUFFETT |
CHAIRMAN,
BERKSHIRE HATHAWAY Benjamin Graham, whom Buf fett considers his guru, coined
the phrase `Margin of Safety', which became the guiding principle and worked as
a safety net for a lot of his followers. This puts a very important perspective
about valuing a company and buying below its intrinsic value, providing the
margin of safety Best Investment
Planning in India. The phrase means that a company's liquid assets depicted on
the balance sheet (net of all debts) must be more than the company's market
capitalization.
Markets
work on a phenomenon called reversion to mean: In euphoric situations,
companies get valued much above their intrinsic value, and in a bad market it
is typically under-valued. However, the belief is that during such a
transition, it reverses to its fair price sometime before it diverges again.
This strategy has a dual advantage: The downside risk is very limited or muted
even if the market were to go down further and, more importantly, the return
potential of the stock becomes much higher if the market were to go up and
arrive at its fair value. -Tanwir Alam.
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