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?"
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.
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).
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).
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