Margin of Safety Is Still King

"Value investing is at its core the marriage of a contrarian streak and a calculator." — Seth Klarman

A margin of safety is the gap between what you pay and what a business is worth — the room you leave yourself to be wrong and still not lose money permanently.

The principle is usually taught for cheap, asset-heavy stocks, but it applies equally to growth businesses. You just apply it to future free cash flows rather than current book value.

The useful question is rarely "is this a great business?" — most well-known businesses are. The sharper question is: what am I paying for its future cash flows, and how wrong can my assumptions be before I start losing money? If the answer is "barely wrong at all", there is no margin of safety, however good the company.

Illustrative example: Amazon (2001)

After the dot-com crash, Amazon's shares fell roughly 90%. Investors who modelled its normalised future cash flows — rather than its loss-making present — could buy at a large discount to a defensible estimate of intrinsic value. The margin of safety came from the price collapse, not from the business being cheap on reported earnings.