risk
Margin of safety
The rule
Always leave room to be wrong. A cushion against bad luck turns a big mistake into one you can walk away from.
Where it flips
A cushion can be too big. Ten years of cash 'to be safe' slowly loses to rising prices. Size the cushion to the real risk, not to fear.
Graham's margin of safety meant paying well below the real worth, so even a wrong guess still leaves you safe. In your own money, the same idea is the emergency fund and good insurance. They are the cushion. A job loss, a hospital bill, or a market fall does not then ruin you. You cannot know which shock will come. But you can build the cushion that lets you survive any of them. Room to be wrong beats a sharp guess you do not really have.
A worked example
Two similar families each face a ₹4,00,000 hospital bill. The one with health cover and six months of expenses saved pays it easily. The other sells investments and takes on debt. [illustrative]
How to spot it
- ·a cushion sized to your own life
- ·cover for the losses you cannot pay yourself
- ·no single event that can end the plan
Benjamin Graham · The Intelligent Investor