Definition
Margin of Safety is a principle of investing and engineering where one only performs actions or builds structures that are expected to function significantly beyond the required capacity, or where the “price” paid is significantly below the “value” received.
Why It Matters
A margin of safety is the ‘insurance policy’ against the inherent uncertainty of the real world; in both structural engineering and financial investing, it is the buffer that prevents a single miscalculation from leading to a catastrophic total failure.
Core Concepts
- Redundancy: Building in extra capacity to handle unexpected loads or failures.
- Valuation Buffer: In finance, purchasing assets at a price far enough below their intrinsic value to account for errors in estimation.
- The Tolerance for Error: Acknowledging that our models of the world are imperfect and building in a “cushion” for those imperfections.