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.

Intrinsic Value in Investment Properties

There exists in all investments an intrinsic value of some kind. This value is a dollar amount, and it is what the investment is “really” worth. The investment may not be worth this amount at any given time because of market conditions, but it does still have this intrinsic value. The intrinsic value is based off of facts, not opinions. It is based off of quantitative information, not qualitative. When we examine a piece of stock, we calculate the intrinsic value based on the amount of assets a company owns minus the debt against it. What is leftover is divided by the number of shares, and each share then has its intrinsic value. Another approach for determining the value of stock is the excess of expected earnings and dividends for a period of years above a normal interest return. To determine the intrinsic value of a piece of property, we can multiply its monthly income by one hundred. This will give us a number to work with.