Margin of Safety Calculator
Calculate the margin of safety between a stock's intrinsic value and market price.
Based on Benjamin Graham's value investing principle.
What Is the Margin of Safety?
The margin of safety is the gap between a stock’s intrinsic value and its current market price. It is the core concept of value investing, popularized by Benjamin Graham in his 1949 book The Intelligent Investor.
The idea is simple: even if your estimate of intrinsic value is wrong, buying at a big enough discount protects you. Graham recommended a margin of safety of at least 33% — meaning you only buy when the stock trades 33% or more below its true value.
Formula
Margin of Safety = (Intrinsic Value − Market Price) / Intrinsic Value × 100%
A positive result means the stock is trading below intrinsic value (potentially undervalued). A negative result means the stock trades above intrinsic value (potentially overvalued).
Graham’s Thresholds
| Margin of Safety | Interpretation |
|---|---|
| > 50% | Very deep discount — rare and risky |
| 33% – 50% | Strong margin — Graham’s preferred zone |
| 10% – 33% | Some discount but limited protection |
| 0% – 10% | Fairly valued, minimal buffer |
| Negative | Overvalued — avoid or sell |
How Is Intrinsic Value Determined?
Common methods include:
- Discounted Cash Flow (DCF) analysis
- Price-to-Earnings based valuation (Graham’s formula)
- Asset-based valuation (book value)
- Dividend Discount Model
No method is perfect — intrinsic value is always an estimate. The margin of safety exists to compensate for uncertainty.
Warren Buffett and Margin of Safety
Buffett, Graham’s most famous student, has called margin of safety “the three most important words in investing.” He refined the concept to focus on businesses with durable competitive advantages (moats), not just statistical cheapness.