Thursday, August 27, 2009

Margin of Safety in Investment Properties

To understand safety, let us take a look at the margin of safety concept. Since we are concerned with the intrinsic value of the stock or real estate, we are not concerned about its price, which can be anything, as it comes from the sentiment of the general market. The only thing we are concerned about is losing value. When we buy significantly below the price, say, we buy a piece of property at eighty percent of its intrinsic value, and then the property prices can drop a whole twenty percent before we lose any value. This difference between the price we buy and the intrinsic value serves as a sort of cushion which buffers us from any drop in price.

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