It's Really Rather Obvious

4 May 2004

When I explained a simple way to think about an investment, I did so in the context of a savings account, a deposit and a business that offers a certain profit (hopefully in cash) on an annual basis. It was admittedly simple, and not the only consideration when considering an investment.

Security AnalysisHowever, some people overlooked the obvious. The same reasoning applies to the purchase of single share or 100 shares or 30,000 shares of a public company. If you’re unwilling to own all of it at the price you’re paying for one share, you’re not getting a great deal on the shares you are buying.

There’s another factor. It’s known as ”margin of safety.” It was explained magnificently in Chapter 20 of The Intelligent Investor by Benjamin Graham. That chapter is titled ”Margin of Safety as the Central Concept of Investment.” If you haven’t read this or been through one of the early editions of Security Analysis, I strongly recommend doing both.

Speaking of margin of safety, the title of a (now out of print) book by Seth Klarman is Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor. You’ll have to dig to find a copy. Some recent aftermarket sales of this book have it priced at $200 and up!

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