The margin of safety

"The most important thing about your circle of competence is not how large the area of it is, it's how well you've defined the perimeter."

The most important thing about your circle of competence is not how large the area of it is, it's how well you've defined the perimeter.

The margin of safety does not promise a gain - it is how much room you leave yourself for being wrong.

No fair value estimate is perfect: it depends on assumptions about future revenue, margins, the rate used to discount cash flows. The margin of safety does not eliminate the risk of having estimated wrong - it still leaves you a way out if you have, as long as the error is not enormous.

The margin you need is not the same for every business: the further you get from what you truly understand - the industry, the business model, how it makes money - the less you can trust your estimate, and the more margin you should demand before buying.

On Fondamentix you find the margin of safety calculated automatically on every company page, but how much margin counts as enough is your own call: you can set it as a filter in the screener, and use it as a personal threshold before looking at any other number.