Week 1 review: the margin of safety

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Key idea: Because every value estimate can be wrong, careful investors only act when the gap between value and price leaves room for error.

You now have the basics: a share is a slice of a business, price and value differ, P/E is quick but fragile, free cash flow is harder to fake, and debt shapes risk.

Every estimate you make will be wrong to some degree. Profits come in lower, a competitor appears, interest rates move. The margin of safety is the idea that you leave room for those errors.

If you estimate a share is worth $100 and it trades at $95, a small mistake wipes out the whole gap. If it trades at $70, you could be wrong by a fair amount and still have paid less than the business is worth. The margin of safety here is ($100 - $70) / $100 = 30%.

Equity Rank shows this gap on every stock page. Treat it as the start of a question: is the gap there because the market is missing something, or because the model is?

Quick check

You estimate a share is worth $80. It trades at $60. What is the margin of safety?

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