The most beautiful, genius things in life are simple.
And therefore, they are difficult to implement.
We like complications. Sophistication. When something appears simple, our first impulse is that of rejection.
We get our families insured, our car insured, house, properties etc. etc. all insured, in fact, we are busy buying protection everywhere. During winter we wear protective clothing. Our children swim with protective gear. Our cars have seat-belts and airbags. The list of how mankind protects itself is endless.
Then why is it that when it comes to putting one’s hard-earned money on the line, all thoughts of protection go out the window, and one becomes malleable enough to jump into the next hot story at even seventy or eighty times earnings?
Why is it that here we are not clinging on to protection? Basic question – are there any protective measures prevalent in the world of investing? The answer is yes, and many. In this article, I’ll name two and address one.
There’s the protective stop-loss (to be differentiated from the trigger-stop). Let’s talk about this one some other day. Right now, let’s focus on the other major avenue for protection, called margin of safety.
Basically, what margin of safety says is “Buy Cheap”. Period. What it’s not saying is that one should buy any odd-ball, cheap stock. It’s referring to quality stocks and telling us to buy them as cheaply as we can. The result will be a buffer price-band, which in case of a major market-crash will still limit our losses and save us from the urge to abandon our investment at rock-bottom prices. So, this concept asks us to have patience and wait for opportunity, and not to be impulsive and plunge blindly.
Margin of safety is applicable while trading also. One can buy into market leaders upon dips. The dip gives one a short-term margin of safety.
The primary advocate of margin of safety is none other than Warren Buffett himself, from an investment point of view.
So, to implement this simple and beautiful concept, one requires the virtues of patience and discipline.
Wishing for you safe and lucrative investing!