Value Investing – Margin of Safety

3 05 2011

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”.

Advertisements

Actions

Information

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s




%d bloggers like this: