The Intelligent Investor’s Motto: Margin of Safety

In Chapter 20 of The Intelligent Investor, Benjamin Graham covers the ” ‘Margin of Safety’ as the Central Concept of Investment.” This big idea or motto is the “secret of sound investment” distilled to three words.

Graham says “the function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.” When considering whether an investment carries a favorable margin of safety, calculations should be based on present circumstances, not overly optimistic or hoped-for future situations.

As I delve into this chapter, I learn that though the margin-of-safety principle is one of the main things, it’s not the only thing relevant to intelligent investing. Its companion is diversification. In addition, I discover that real-life adherence to safety margins isn’t simple or always achievable.

Still, the concept is important and mathematical framework, crucial to the task of selecting securities and building a portfolio.

Market Fluctuations: How to Act When They Happen

Chapter 8 of The Intelligent Investor focuses on dealing with market fluctuations. Graham opens this chapter advising investors to know about the possibility of these ups and downs. He urges us to be prepared financially and psychologically.

To be clear about the nature of potential fluctuations, Graham describes a probable set of circumstances. Within the next five years, shares of a given security may experience a 50+% price increase from its low point or a 30+% decline from its high point. Such changes in stock prices may bear no relationship to changes in economic values.

While the rise in prices sounds great, the decrease seems scary. Still, it’s this scenario for which Graham wishes to equip investors to withstand (and possibly profit from). He offers advice that I interpret in this way:

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