Margin of safety
The gap between what you pay and what you think it is worth — the room to be wrong.
Margin of safety = (intrinsic value - price) / intrinsic value
Buy below: intrinsic value x (1 - required margin)What it means
Every valuation is an estimate built on assumptions that will turn out to be somewhat wrong. The margin of safety is the discount demanded to make that acceptable: buy at seventy-five cents of estimated value, and the estimate can be a quarter too optimistic before any money is lost.
It is a statement about confidence rather than about the company. The less predictable the business, the wider the discount required — which is why the same investor will pay much closer to estimated value for a utility than for a semiconductor company.
Worked example
An intrinsic value of $131.19 a share against a market price of $120.
- 1131.19 - 120 = $11.19 of cushion.
- 211.19 / 131.19 = 8.5%.
- 3At a 25% required margin, the buy price would be 131.19 x 0.75 = $98.39.
An 8.5% margin of safety: real, but far short of a 25% requirement.
Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.
How investors read it
- Set the required margin before running the valuation, not after. Deciding afterwards is how a model becomes a justification.
- A wide margin on a business you cannot forecast is not safety, it is a wider spread on a guess.
- If nothing clears the bar, that is a result. Most of the time most things are roughly fairly priced.
Where it misleads
- It is measured against your own estimate, so it inherits every error in it — and a 30% margin on a valuation that is 50% too high is no margin at all.
- It says nothing about how long the gap takes to close, and it can widen for years.
- A large apparent discount is frequently the market knowing something the model does not.
How Materiality uses it
Not applied automatically anywhere. The Valuation tab shows the modelled value against the price with a fair band of ten percent either side, so a small gap reads as fair rather than as a signal, and what margin to require is left to the reader. The calculator below works it the other way round: give it a value and a required margin, and it returns the price to buy at.
The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.
Work it out yourself
Related metrics
Intrinsic value
What a business is worth based on the cash it can produce, rather than on what it is currently priced at.
Discount rate
The return you require, which is what makes a dollar in five years worth less than a dollar today.
Terminal growth
The rate a business is assumed to grow at forever, after the years anyone actually forecast.
Price to earnings
What you pay per dollar of annual profit.
A metric on its own is a number without a business attached to it. Materialitycomputes these from a company's own SEC filings, several years of them at once, and explains what the pattern means rather than leaving you to hold fifteen definitions in your head.