What this unit covers
Learn to calculate margin of safety, the gap between price and estimated value, as protection against being wrong.
By the end you will be able to
- Calculate margin of safety using (Estimated Value minus Price) divided by Estimated Value.
- Explain why a value estimate is always somewhat wrong, and why the buffer size matters more than precision.
- Distinguish price from estimated value, and avoid measuring the discount against the wrong one.
How it starts: Two Estimates, Same Company
- You study a company and decide its shares are worth 100 rupees each.
- Someone else studies the same company and reaches the same 100 rupee estimate.
- One of you buys near 100 rupees, the other waits and buys lower.
Words you will meet
- Margin of Safety
- The gap between what you believe something is worth and the price you pay for it.
In this module: Valuation Without Fear
- Why Price Isn't Value
- Intrinsic Value Simplified
- Margin of Safety (this unit)
- When to Buy & When to Wait
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