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EDITOR’S NOTE: Although it has been some time since speaking live with busy colleague Vitaliy Katsenelson CFA, I review his internet material frequently and appreciate this ME-P series contribution. I encourage all ME-P readers to do the same and consider his value investing insights carefully.
By Vitaliy Katsenelson, CFA
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| 4. Margin of safety – leave room in your buy price for being wrong Margin of safety is a function of two dimensions: a company’s quality and its growth. I am generalizing here, but exogenous events have a greater impact on a lower-quality business than a higher-quality one. Thus a high-quality company needs a lower margin of safety than a lower-quality one. A company that is growing earnings and paying dividends has time on its side and thus may not need as much margin of safety as a lower-growing one. We quantify both a company’s quality and growth, and thus margin of safety is deeply embedded in our investment operating system. The larger discount to the stock’s fair value (the $1) the less clairvoyance you need to have about the future of the business. For instance, in 2013, when Apple stock was trading at $400 (pre-split) we didn’t have to have a very clear crystal ball about Apple’s future; Apple just had to be able to barely fog the mirror. In later years, at $900, we need to have a lot more precision in our analysis of Apple’s future. CITE: https://www.r2library.com/Resource/Title/082610254 |
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Filed under: "Ask-an-Advisor", Experts Invited, Financial Planning, Glossary Terms, Investing | Tagged: margin of stock safety, value investing, value stocks, Vitaliy Katsenelson CFA | Leave a comment »
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