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& #39;s in 20%-30%? Over the long term, that is nothing. Why can& #39;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& #39;s say a stock is at 100 and I think it& #39;s Fairly Valued. But I wouldn& #39;t purchase it. I would need it at Rs. 70.

Now, let& #39;s jump 10 years and say the stock is now at 500. From 100, that& #39;s a 17.46% CAGR. But from 70, it& #39;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& #39;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& #39;s not "just" the 30% that I am giving up. I am giving up the vast safety net of performing well even when I& #39;m wrong (Primarily- which I will most likely be) and getting an extraordinary payout when I& #39;m right (Secondarily - sometimes).