WARREN Buffett once said that “margin of safety” has been the bedrock of his investing success for decades. But what do those three words mean?
Let’s use an analogy: imagine you are an engineer and you are tasked to build a bridge that can withstand cars weighing 1,000 kg every day. How strong would you make the bridge – Should it be able to support 1,000 kg or 1,500 kg?
If you chose the first option, you are cutting it close. But if you chose the second option, you have grasped the concept of margin of safety.
In investing, margin of safety is about leaving room for error because you never know what will happen in the future.
Think about the pandemic which shook the world three years...
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