what is margin of safety 
margin of safety is a principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value in other words when the market price of a security is significantly below your estimation of its intrinsic value the difference is the margin of safety because investors may set a margin of safety in accordance with their own risk preferences buying securities when this difference is present allows an investment to be made with minimal downside risk alternatively in accounting the margin of safety or safety margin refers to the difference between actual sales and break even sales managers can utilize the margin of safety to know how much sales can decrease before the company or a project becomes unprofitable investopedia michela buttignolunderstanding margin of safetythe margin of safety principle was popularized by famed british born american investor benjamin graham known as the father of value investing and his followers most notably warren buffett investors utilize both qualitative and quantitative factors including firm management governance industry performance assets and earnings to determine a security s intrinsic value the market price is then used as the point of comparison to calculate the margin of safety buffett who is a staunch believer in the margin of safety and has declared it one of his cornerstones of investing has been known to apply as much as a 50 discount to the intrinsic value of a stock as his price target taking into account a margin of safety when investing provides a cushion against errors in analyst judgment or calculation it does not however guarantee a successful investment largely because determining a company s true worth or intrinsic value is highly subjective investors and analysts may have a different method for calculating intrinsic value and rarely are they exactly accurate and precise in addition it s notoriously difficult to predict a company s earnings or revenue example of investing and margin of safetyas scholarly as graham was his principle was based on simple truths he knew that a stock priced at 1 today could just as likely be valued at 50 cents or 1 50 in the future he also recognized that the current valuation of 1 could be off which means he would be subjecting himself to unnecessary risk he concluded that if he could buy a stock at a discount to its intrinsic value he would limit his losses substantially although there was no guarantee that the stock s price would increase the discount provided the margin of safety he needed to ensure that his losses would be minimal for example if he were to determine that the intrinsic value of xyz s stock is 162 which is well below its share price of 192 he might apply a discount of 20 for a target purchase price of 130 in this example he may feel xyz has a fair value at 192 but he would not consider buying it above its intrinsic value of 162 in order to absolutely limit his downside risk he sets his purchase price at 130 using this model he might not be able to purchase xyz stock anytime in the foreseeable future however if the stock price does decline to 130 for reasons other than a collapse of xyz s earnings outlook he could buy it with confidence margin of safety in accountingas a financial metric the margin of safety is equal to the difference between current or forecasted sales and sales at the break even point the margin of safety is sometimes reported as a ratio in which the aforementioned formula is divided by current or forecasted sales to yield a percentage value the figure is used in both break even analysis and forecasting to inform a firm s management of the existing cushion in actual sales or budgeted sales before the firm would incur a loss 