MARGIN OF SAFETY

The practice of reducing investment risk by investing in company shares when they can be purchased at a discount from our appraised value. Companies able to provide predictable streams of earnings, cash flow or increases in shareholder equity have higher margins of safety.

Investing - putting capital at risk by purchasing a fractional share of a publicly traded business.

Discount - a price less than appraised value. The larger the discount, the greater the margin of safety, or, put otherwise, the less the risk of permanent capital loss.

Appraised value - the quantitative evaluation of a company's worth based on an analysis of its financial statements. The value determination is based on qualitative analysis as well. Ultimately a company's appraised value is based on many factors that lead to a judgment of its worth.

Predictable - able to provide a high degree of certainty through obligations or commitments that can only change under unusual conditions.

Typical metrics for appraising companies:

1. Price to earnings
2. Price to book - both total and tangible
3. Price to free cash flow
4. Dividend yield

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