I was musing about Benjamin Graham’s Margin of Safety (MOS) during my waking hours last night and it occurred to me that MOS is not only a great tool for finding undervalued businesses but also to time the market. I know that value investors are not supposed to time the market but good MOS can only develop under two conditions: 1 – the business is genuinely undervalued during normal market conditions (this can occur for many reasons); 2 – the market as a whole declines reducing the price of all stocks (e.g. during the GFC). In the second scenario the by-product of MOS is to assist us timing the market. Obviously, MOS cannot tell us the top or the bottom of the market but when the stocks decline across the board a juicy MOS would only develop closer to the bottom. “It’s about being approximately right, rather than absolutely wrong”.
Value Investing – Margin of Safety3 05 2011