Margin of Safety

Physician's Money Digest, February15 2004, Volume 11, Issue 3

You can't avoid periodic investmentlosses, but you can limit them significantly.The ability to minimize losses leads tomarket-beating returns over long periods.In fact, various studies have shown thatbuying stocks at cheap prices relative tothe market leads to outstanding returns.How cheap is cheap? There's no singleanswer. To be safe, give yourself a pricecushion—the bigger the better. Writingin 1949, investment legend BenjaminGraham dubbed this an investor's “marginof safety.” Investors can easily rationalize—after the fact—their decision tobuy a stock, even when they paid toomuch. But these justifications tend to besubjective and reflect an unwillingness toacknowledge mistakes. The key is toleave ample elbowroom for your errors.