Intrinsic Value and Margin of Safety.
Benjamin Graham introduced two key concepts: the ‘intrinsic value’ of a company and the ‘margin of safety’ as a fundamental part of his investment philosophy.
INTRINSIC VALUE
Intrinsic Value: The ‘intrinsic value’ represents the actual or substantial value of a company, which may differ from its current market price. In other words, it is the value that a company would have if it were liquidated, generated a consistent income, and maintained responsible and prudent management. This value is based on fundamental factors such as future cash flows, earnings, dividends, and book value. Graham argues that intelligent investors should seek to determine the intrinsic value of a company through fundamental analysis. The goal is to find companies that are currently undervalued by the market compared to their true intrinsic value. This concept forms the foundation of Graham’s ‘value investing’ approach.
MARGIN OF SAFETY
Margin of Safety: The ‘margin of safety’ is a key principle in Graham’s philosophy. This concept suggests that investors should only buy stocks when their market price is significantly lower than their intrinsic value. In other words, the ‘margin of safety’ implies buying at a discount. This margin of safety serves to protect the investor from potential losses. Since no one can predict the future movements of the stock markets with certainty, purchasing with a margin of safety allows investors to better withstand market fluctuations and reduce the risk of loss.
CONCLUSION
The idea is that even if forecasts or estimates are incorrect if you have bought at a price significantly below intrinsic value, you have a kind of ‘cushion’ protecting your capital.
In summary, Benjamin Graham taught investors that fundamental analysis should be used to calculate the intrinsic value of a company. Investors should seek to purchase stocks with a ‘margin of safety. This approach emphasizes caution, thorough research, and capital preservation as fundamental elements of success in investing.”