Calculating the Margin of Safety by Ben Graham
Risk is an integral part of any investment activity. Even though there are inherent risks in making investments, especially for stocks, there are ways to still be very confident in making any investment. According to the pioneer of value investing, Ben Graham, risk management can be obtained while stock investing through the concept of the margin of safety.
The margin of safety is defined as the difference between the intrinsic value of the investment and the market value of the investment. While the market value of a stock is relatively easy to find, it is the intrinsic value which can be difficult to calculate. In his book, Security Analysis, Graham asserts a formula for using the price to earnings ratio of a company to then determine the intrinsic value.