What is Margin of Safety?
The Margin of Safety (MOS) is the percent difference between the current stock price and the implied fair value per share.
The margin of safety, one of the core principles in value investing, refers to the downside risk protection afforded to an investor when the security is purchased significantly below its intrinsic value.
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How to Calculate Margin of Safety (MOS)
The margin of safety (MOS) is one of the fundamental principles in value investing, where securities are purchased only if their share price is currently trading below their approximated intrinsic value.
Conceptually, the margin of safety is the difference between the estimated intrinsic value per share and the current stock price.
By selectively investing in securities only if there is sufficient “room for error”, the downside risk of the investor is protected.
Therefore, the margin of safety is a “cushion” that allows some losses to be incurred without suffering any major implications on returns.
In effect, purchasing assets at discount causes the risk of incurring steep losses to reduce (and reduces the chance of overpaying).
Margin of Safety Formula
To estimate the margin of safety in percentage form, the following formula can be used.
- Current Share Price → The share price of the company’s stock on the present date.
- Intrinsic Value → The implied value of a company’s equity on a per share based on the fundamentals of the issuer.
Margin of Safety Calculation Example
Suppose a company’s shares are trading at $10, but an investor estimates the intrinsic value at $8.
In this particular example, the margin of safety (MOS) is 25%, which implies the stock price can sustain a decline of 25% before reaching the estimated intrinsic value of $8.
- Stock Price = $10.00
- Intrinsic Value Per Share = $8.00
- Margin of Safety (MOS) = 1 – ($10.00 – $8.00) = 25.0%