Glossary term
Margin of Safety
Benjamin Graham's rule for buying only when price sits meaningfully below a conservatively estimated intrinsic value, so errors, bad luck and things nobody could have known are absorbed by the discount rather than by the investor.
Definition & Origin
Graham introduced the margin of safety in Security Analysis (1934) and made it the organizing principle of The Intelligent Investor (1949): buy only when price sits well below a conservatively estimated intrinsic value, so the gap — not managerial skill or market timing — absorbs errors of estimation, bad luck and events nobody could have priced in. Graham's own practice treated roughly a third below fair value as the threshold worth acting on; the exact number matters less than treating the discount as a fixed rule rather than a feeling that gets negotiated away once a story turns attractive. The margin exists because every estimate of a business's worth is wrong by some amount, even when the analysis behind it is careful and complete — the only real question a buyer needs answered is whether the price paid survives being wrong, not whether the estimate itself turns out exactly right.
Not the Same as a Low Price
A cheap stock and a margin of safety are not synonyms. A stock at ten times earnings can carry no margin at all if those earnings are about to collapse; a stock at twenty times earnings can carry a wide one if intrinsic value is understated by growth nobody has modeled yet. The margin is the gap between price and a conservative estimate of value, which means it requires doing the valuation work first rather than substituting a multiple for that work. Jumping straight to a low P/E, a low P/B, or any single cheap-looking ratio and calling it safety is the most common misreading of Graham, and the exact error his concept was written to correct — a screen that stops at the multiple is measuring price alone, not the gap between price and worth that actually protects capital when the estimate goes wrong.
How Closelook Uses It
The idea surfaces wherever a value module compares price to an estimated fair range rather than to a peer multiple alone — the discount, not the multiple itself, is what gets flagged for the reader to weigh. Established ratios like FCF yield and EBITDA multiple sit on the stock pages with their universe percentile, so a reader can build a Graham-style comparison without Closelook substituting its own verdict on where fair value sits. See Intrinsic Value for how that estimate gets built from assets, earnings power and prospects, and Mr. Market for why the discount has to survive a counterparty whose daily quote is not always rational — the margin is the buffer that makes his mood swings survivable rather than decisive.