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The difference between a security's estimated intrinsic value and its market price, representing a buffer against errors in analysis or unforeseen events.
Coined by Benjamin Graham, the father of value investing, the margin of safety is a core principle that protects investors from permanent capital loss. If you estimate a stock is worth $100, buying it at $60 provides a 40% margin of safety. This buffer accounts for the inherent uncertainty in any valuation estimate. Graham recommended a margin of safety of at least 33%, while his student Warren Buffett has emphasized that the concept is the three most important words in investing. The larger the margin of safety, the lower the risk and the higher the potential return.