“Margin of safety” is something that you will hear investors talk about all the time.
Having spent a lot of time researching and refining margin of safety over the years, I have come to the conclusion that most of them don’t actually know what the hell they are talking about.
There are several facets to investing with a margin of safety and if you don’t pay attention to all of them you are NOT maintaining any margin of anything, much less safety.
In engineering, a margin of safety is easy to understand.
If a bridge is going to have a 10,000-pound truck driving over it every day, design it to carry several 20,000-pound trucks at once. If a building is in Miami and can be expected to undergo 150 miles per hour hurricanes a few times, design it to withstand sustained 250 MPH storms.
In other words, build to experience a multiple of the worst-case scenario.
As an investor, as you begin analyzing an opportunity, you have to ask yourself a very blunt question: