Margin of Safety, Explained

When contemplating an investment, I might get excited about a company and want to immediately snap up shares of its stock. But I’ve learned that I should try to determine the value of the company and a fair price for the company’s stock before buying. As a general rule, I don’t want to pay more for a company than it is worth.

Going further with this idea, I may decide to invest only if I can pay less than the company’s value. If I adopt this philosophy, I buy shares of a company only when its price represents a bargain or discount from its value. That is, I incorporate a margin of safety into my investing decisions.

This idea of a “margin of safety” has been articulated and popularized by value investing thought leaders Benjamin Graham, the author of The Intelligent Investor, and Warren Buffett, Graham disciple and billionaire investor.

The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, and nonexistent at some still higher price.” — Benjamin Graham, The Intelligent Investor

Portfolio Turnover, What It Is and Why It Matters

I learned a harsh lesson about portfolio turnover during a recession. I was forced to pay capital gains taxes on distributions of a long-term mutual fund holding, even though I didn’t sell any fund shares and even though the fund value had dropped more than 20% that year.

This experience taught me about portfolio turnover and related expenses, including taxes (along with the generally wise and tax-efficient approach of purchasing mutual funds for tax-advantaged accounts, not taxable ones). Since then, I have paid more attention to this notion, not in fear of turnover but recognition of its potential costs and benefits.

So, what is portfolio turnover and why does turnover matter?

What is Asset Allocation?

When I’ve read about investing and considered the services of investment advisory firms, I’ve often encountered the term of asset allocation.

What is asset allocation? A simple definition: it’s putting my proverbial eggs in multiple, uncorrelated baskets. For an investor, this process involves allocating investments among the big three types of asset classes: equities, fixed income instruments, and cash and its equivalents.