Margin of safety (safety margin) is the difference between the value of a property and its market price.
Application to investing
Using margin of safety, one should buy property when it is worth more than its price on the market. This is the central thesis of value investing philosophy which espouses preservation of capital as its first rule of investing.
The margin of safety protects the investor from both poor decisions and downturns in the market. Because fair value is difficult to accurately compute, the margin of safety gives the investor room for error.
A common interpretation of margin of safety is how far below market value one is paying for a property. For high demand property, value investors typically want to pay no more than 90 cents for a dollar (90% of market value) while more speculative property should be purchased for up to a 50 percent discount to market value (50 cents per dollar).
Application to investing
Using margin of safety, one should buy property when it is worth more than its price on the market. This is the central thesis of value investing philosophy which espouses preservation of capital as its first rule of investing.
The margin of safety protects the investor from both poor decisions and downturns in the market. Because fair value is difficult to accurately compute, the margin of safety gives the investor room for error.
A common interpretation of margin of safety is how far below market value one is paying for a property. For high demand property, value investors typically want to pay no more than 90 cents for a dollar (90% of market value) while more speculative property should be purchased for up to a 50 percent discount to market value (50 cents per dollar).
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