The Five Levels of Safety Margins - Fastest Withdrawal Cryptocurrency Exchange Platform

The margin of safety is the central concept of investment.

According to Graham’s view,

“If a bridge is designed to carry 30,000 pounds,

but only trucks of 10,000 pounds are allowed to pass,

the extra 20,000 pounds is the safety margin,”

the safety margin is the starting point for investors to buy,

and also the source of investment profits.

Safety margin = intrinsic value of the company - purchase price of the company.

Buying stocks at 0.4 yuan when the intrinsic value is 1 yuan,

means your safety of investment return is very high,

and you can even sell at 0.8 yuan or 0.6 yuan,

this is the operational method from Graham’s era,

and also the practical plan Buffett followed early in his career.

With the global development of financial markets and the Industrial Revolution,

this specific operational method has been continuously upgraded and iterated,

through the continuous promotion and evolution by Buffett,

Duan Yongping, and others,

I believe that today’s concept of safety margin has many differences from the earliest Graham era 90 years ago,

summarized in the following aspects,

layer by layer.

First level of understanding: the stock price at purchase is sufficiently low.

Based on the concept and formula,

to have enough safety margin,

the purchase price of stocks must be sufficiently low,

at least below the intrinsic value of the enterprise itself.

This should be quite understandable,

just like eggs of the same quality,

who would dislike a seller lowering the price to sell to you? Clearly worth 1 yuan,

but the market offers you a price of 0.8 yuan or even 0.4 yuan,

isn’t that good? We certainly welcome it,

as long as we can confirm they are eggs of the same quality,

the lower the price, the greater the safety margin.

Note,

the low price here refers to relative to the intrinsic value of the enterprise,

not simply a low PE or PEG,

and definitely not just a low stock price.

I believe investors with some basic knowledge can distinguish this clearly.

This is the safety margin achieved by buying at a low price.

Second level of understanding: at the time of purchase,

the company’s intrinsic value is sufficiently high.

First,

this “sufficiently high” refers to relative to the market price you pay for the stock,

of course,

this is the same as the previous understanding,

requiring you to evaluate the intrinsic value of the enterprise as a premise.

This at least ensures your investment starts with a certain safety margin.

Secondly,

a company’s intrinsic value can also be reflected through its growth.

For example,

when you buy at a price less than or equal to its value,

and after purchase,

the value continues to grow,

then you can continue to gain higher and larger safety margins,

making the investment safer.

Therefore,

in an extreme case,

your safety margin at purchase is zero,

meaning price equals value,

but after purchase,

since the price remains unchanged,

but the intrinsic value keeps increasing,

this situation can also be regarded as having enough safety margin,

which is the so-called “buying good companies at a reasonable price.”

Not necessarily aiming for the purchase price to be less than the intrinsic value,

they can be equal.

Growth can be part of the safety margin when buying.

Third level of understanding: safety margin applies only to companies within your circle of competence,

you need to truly understand the enterprise.

First,

without your circle of competence,

there can be no safety margin,

because you might not even be able to evaluate the intrinsic value of the company.

Second,

this is difficult,

because the scope of your circle of competence can be vague,

and not understanding might also be a fuzzy area,

being in the middle of not understanding and not acting,

a vast and uncertain sea,

vague and very hard to judge.

Remember Buffett’s words,

if you don’t know where the boundary is,

it means it’s outside your circle of competence.

Again,

within your circle of competence,

find companies you truly understand,

know their business models,

understand their culture,

values, etc.,

and do not act if you don’t understand.

Only with enough understanding,

can there be enough safety margin.

This is how your circle of competence can be your safety margin.

Fourth level of understanding: the safety margin is both your starting point for buying,

and the source of your investment returns,

and it likely determines your actual investment yield.

After achieving the previous points,

when you are truly deciding to buy stocks,

another important question arises,

what is your expected return? What will your actual investment return be? Is buying at 0.8 yuan more profitable,

or is buying at 0.4 yuan more aligned with your return expectations? Does this purchase price also depend on your expected rate of return? If your expected return is very high,

perhaps you need to wait for a lower price,

but will a lower price come? How should you manage your expected rate of return? Think about how Buffett and Duan Yongping anticipate their returns—Buffett often beats the S&P 500,

Duan Yongping says beating the ten-year risk-free rate is enough,

but what are their actual investment returns? Therefore,

the impact of safety margin on your investment is multifaceted,

and it can be said that your entire investment process is influenced by this factor.

Perhaps you haven’t yet realized how important it is.

This is how expected return can be your safety margin.

Fifth level of understanding: safety margin is an investment path,

an investment skill,

a way of thinking,

a strategy.

It is also the idea of “winning before fighting” from Sun Tzu’s Art of War.

The “Art of War” explicitly states: “The skillful warrior

stands on an invincible ground,

and does not lose to the enemy.

Therefore, victorious soldiers win first and then seek battle,

defeated soldiers fight first and then seek victory.”

This emphasizes that a truly skilled strategist

creates conditions for victory first,

then seeks opportunities to fight; whereas the defeated often rushes into battle first,

hoping for luck to turn the tide.

What difference does this have with our investment? None at all! Safety margin is about ensuring you stand on an invincible ground,

combined with Sun Tzu’s emphasis that “victory can be known but not forced,”

victory can be planned in advance,

but cannot be forced.

Safety margin is something we can judge beforehand,

even with a certain safety margin,

it is only “victory can be known but not forced,”

having enough safety margin does not guarantee huge investment success.

But,

at least it prevents failure.

Remember,

not losing in the stock market means not losing money,

not losing money means you have already beaten 90% of investors.

From this perspective,

it is also a kind of victory.

Think about Sun Tzu’s “The Art of War,” written by our ancient military strategist Sun Wu between 515 and 512 BC,

and the safety margin concept introduced in Graham’s “Security Analysis” in 1934,

a gap of nearly 2500 years.

We must admire the wisdom of our ancestors.

Therefore,

safety margin is both the “Dao” (the Way),

and the “Skill,”

and “Dao” is higher than “Skill,”

“Skill” originates from “Dao,”

and safety margin is precisely this integration of the Way and Skill,

a mysterious existence.

In summary,

safety margin is a multi-dimensional,

three-dimensional,

constantly influencing your investment decisions and thoughts,

an essential factor for good investing,

true value investing,

you need to understand safety margin from all aspects,

experience safety margin,

and gradually feel it through practice.

Safety margin itself is a mysterious combination of the Dao and Skill,

and investing is both art

and science,

and even metaphysics.

Is it profound or not?

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