Read on Twitter
1/ A short thread on Margin of Safety.
My general practice is to claim 20%-30% Margin of Safety on every single one of my investment decisions. So, naturally I get a lot of queries asking me "What's in 20%-30%? Over the long term, that is nothing. Why can't you just give it up?"
My general practice is to claim 20%-30% Margin of Safety on every single one of my investment decisions. So, naturally I get a lot of queries asking me "What's in 20%-30%? Over the long term, that is nothing. Why can't you just give it up?"
2/ If we lived in a world of Simple Interest, I would give up the 20%-30% discount in a heartbeat. Fortunately or unfortunately, we live in world of Compound Interest. That makes a BIG difference. How?
3/ Let's say a stock is at 100 and I think it's Fairly Valued. But I wouldn't purchase it. I would need it at Rs. 70.
Now, let's jump 10 years and say the stock is now at 500. From 100, that's a 17.46% CAGR. But from 70, it's a CAGR of 21.73%, almost +5% additional COMPOUNDING.
Now, let's jump 10 years and say the stock is now at 500. From 100, that's a 17.46% CAGR. But from 70, it's a CAGR of 21.73%, almost +5% additional COMPOUNDING.
4/ BUT, this is not the major utility of the Margin of Safety. It is mainly to protect myself from being incorrect (Which I will be, many times in my investing career).
5/ Let's consider scenarios where the stock only made 3x or 4x over 10 Years - not particularly good returns.
But if your Purchase Price was actually 70 i.e. including MoS, the returns would actually be quite commendable, even at the lowest point (Highlighted below).
But if your Purchase Price was actually 70 i.e. including MoS, the returns would actually be quite commendable, even at the lowest point (Highlighted below).
6/ So if I ignore the Margin of Safety, it's not "just" the 30% that I am giving up. I am giving up the vast safety net of performing well even when I'm wrong (Primarily- which I will most likely be) and getting an extraordinary payout when I'm right (Secondarily - sometimes).
