Skip to Content

Margin of Safety: Personal Finance Style

One phrase bandied around more than others in the investment world is Margin of Safety. It probably means having a high confidence of assuredness in not losing money.

And it is something a lot of investors say as long as the stock price can fall a lot and my buy price is far below the current price, I have margin of safety.

Today probably we are not going to talk about active investing, so perhaps lets make that as some soul searching whether the above explanation is margin of safety.

We came across an article that perhaps well articulates how this phrase can be used to describe assuredness in living ones life.

[Farnam Street | Margin of Safety]

Not many can give an analogy that makes understanding the concept simple but the author was able to. It might help you guys in the soul searching above.

The author highlights how we can build margin of safety into the way we use our money in daily lives.

The year is drawing to a close, and talking to friends makes me realize that most of them have built in adequate short circuit mechanisms in their financial management.

It bears remembering what the author raised as the three margin of safety

  1. Level 1 margin: Adequate Emergency Liquidity of 12 months salary
  2. Level 2 margin: If you earn $8k/mth as a household, spend $4k/mth
  3. Level 3 margin: Enhanced savings gets funnel to wealth building

News articles seem to indicate that such circuit breakers are not popular and the fundamental reasoning that properties will always work out well in this country. Not to worry. Seems unlike the people, the government built so much margin of safety to the detriment of the people sometimes.

Hope you enjoy the article.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Ng Joon Khang

Friday 27th of December 2013

I thought you are going to define MOS according to graham. You are more warren, I realised.

btw, I have a question:

I have qn u have wanting to ask. Your calculation of ROiC, why did u exclude current liabilities?

I ask because it defied logic when I work the numbers for Lee metals. It’s ROiC is super high in the range of 30 plus from 2007-2010 because of high current loans for inventories.. Hardly a good gauge for capital allocation. It’s loans went down but maintain bottom line. That’s should mean there are managing better, but ROIC tell a different pic.. A bit the confused

Kyith

Friday 27th of December 2013

Hi joon khang on my way to work but which formula are u taking reference that I deduct current liabilities.

In general, we are looking at equity + debt financing and one way is to take out the current liabilities and excess cash

This site uses Akismet to reduce spam. Learn how your comment data is processed.