San Francisco Financial Planner, San Francisco Financial Advisor

The world around us has many risks that we cannot control, so we plan accordingly. Essentially, you give yourself some room for error — or a margin of safety in the event something unexpected occurs or your assessment is overly optimistic. In the investment management process, there’s also a margin of safety. While the term may have many different connotations in finance, the most common usage occurs in security analysis, where it refers to the amount by which a security is priced (or “available for purchase”) below its intrinsic value.

"Price is what you pay -- Value is what you get", said Warren Buffett. Valuing a business is, therefore, a fundamental skill that every value investor must master to be able to discern the intrinsic value of a business. If you’ve already guessed this has something to do with value investing, you’re right. Benjamin Graham, who is often referred to as the father of value investing, first introduced the term in his 1934 book, Security Analysis, which he co-authored with David Dodd. He later revisited it in the much more readable The Intelligent Investor, published in 1949. Today, many well-known value investors, including Warren Buffett (“Berkshire Hathaway”), Mason Hawkins (“Southeastern Asset Management”), Seth Klarman (“The Baupost Group”), Glenn Greenberg (“Chieftain Capital”), Charles Brandes (“Brandes Investment Partners”), Robert Rodriguez (“FPA Capital”) and Joel Greenblatt (“Gotham Capital”) are advocates of the concept.