Margin of safety calculator

The margin of safety is the gap between what you think something is worth and what you have to pay for it. It exists because your estimate of value is uncertain, and the discount is what protects you when the estimate turns out to be too high.

There are two ways to express that gap, and they are constantly mistaken for each other. Divide by the value and you get the discount to intrinsic value, which is the classic form and can never exceed 100%. Divide by the price and you get the upside, which is unbounded.

At a price of $60 against a value of $100, the margin of safety is 40% and the upside is 67%. Same two numbers, same gap, different question. Materiality's own valuation tab reports the upside form under the heading Margin of safety, so this calculator shows both and labels which is which.

Margin of safety = (value - price) / value
Upside to value  = (value / price) - 1

You estimate a business is worth $100 a share. It trades at $60.

1. 1The gap is $40 a share.
2. 2As a share of value: 40 / 100 = 40%.
3. 3As a share of price: 40 / 60 = 67%.

• How much margin is enough depends on how confident you are in the value, not on a fixed threshold. A stable business you understand well justifies a smaller one than a cyclical business you do not.
• A negative margin means the price is above your estimate. That is information, not a verdict: it may mean the market knows something, or that your assumptions are conservative.
• The margin is only as good as the value estimate. A 50% margin of safety against a careless valuation is not safety at all.

• Quoting one convention and calling it the other. The upside figure is always the larger of the two, which makes it the one that gets quoted.
• Treating the margin as a prediction of return. It is protection against being wrong, not an expected gain.
• Widening the value estimate until a margin appears. The estimate has to come first.

What each of these inputs actually is, where it comes from in a filing, and where it misleads.