📖Warren Buffett
Margin of Safety Framework
Always buy at a significant discount to intrinsic value.
The three most important words in investing are margin of safety. You don't try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin.
🏠 Everyday Analogy
📖 Core Interpretation
The margin of safety framework accepts uncertainty as a permanent feature of investing. You cannot estimate intrinsic value with perfect precision, so you buy only when price is meaningfully below conservative value. The discount is not just about getting a bargain. It is a buffer against analytical error, cyclical stress, and rare events that are hard to forecast but expensive when ignored.
💎 Key Insight：Large margins of safety compensate for errors in judgment.
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❓ Why It Matters
Without a margin of safety, small mistakes become permanent capital damage. Many failed investments were not completely wrong ideas, only overpriced entries with no room for error. Ignoring this rule leaves a portfolio fragile to valuation compression, credit shocks, and expectation resets. The same business risk becomes much more dangerous when purchased at an optimistic price.
🎯 How to Practice
Start with conservative assumptions, then pressure test under multiple scenarios. Require a clear discount to your value range before initiating a position. Tie position size to margin quality: thinner buffer, smaller weight. If a thesis depends on best case forecasts to justify price, pass. Discipline in entry price is the operational core of margin of safety.
⚠️ Common Pitfalls
Using low valuation multiples as a substitute for true downside analysis.
Ignoring balance sheet strength and liquidity risk.
Lowering required discount because of fear of missing out.
📚 Case Studies
1
Washington Post purchased at deep discount (1973)
Buffett bought Washington Post shares during a depressed market when price was far below his estimate of business value.
✨ Outcome：As value was recognized over time, the investment delivered strong long term results.
2
Goldman Sachs preferred structure in crisis (2008)
Berkshire invested in Goldman Sachs through preferred shares with warrants, emphasizing strong cash terms and downside protection.
✨ Outcome：The structure captured upside while limiting risk in a highly uncertain period.
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