← Mental Models
Mental Models · Card 2
Margin of Safety
Plan to be wrong sometimes.Pay a price that allows it.
- Estimated worth
- Price paid
- ₹1,000 a share
- ₹750, room to be wrong
Never pay right up to the edge of what you think something is worth; leave room for being wrong.
1,000
What I think it's worth
750
What I'm actually paying
The ₹250 gap is room for being wrong.
In Practice
If you estimate a company is worth ₹1,000 a share, buying at ₹750 leaves room for your estimate to be wrong and still come out fine.
Generic Example
Packing a day's buffer before an important meeting leaves room for a delayed flight without ruining anything.
Ask yourself
If I'm wrong about this by 20%, do I still come out okay?