#4: The Six Commandments of Value Investing

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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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