1/6 Thread: Margin of safety
The core idea is simple and intuitive: buy a company substantially lower than its intrinsic value.
Broadly speaking, it is hard to argue against the idea of margin of safety. It is how investors approach the margin of safety that can wildly differ.
The core idea is simple and intuitive: buy a company substantially lower than its intrinsic value.
Broadly speaking, it is hard to argue against the idea of margin of safety. It is how investors approach the margin of safety that can wildly differ.
2/6 Many investors change discount rates to see whether there is margin of safety from the current price.
But isn't changing the discount rate to estimate downside essentially a bet on exogenous macro variables (e.g. interest rates, risk premiums etc)?
But isn't changing the discount rate to estimate downside essentially a bet on exogenous macro variables (e.g. interest rates, risk premiums etc)?
3/6 Most funds, especially long-only funds are not in the business of taking those macro bets. Then why approach margin of safety with discount rates?
I approach margin of safety purely from company specific fundamentals perspective.
I approach margin of safety purely from company specific fundamentals perspective.
4/6 What do I have to assume in growth rates, margins, market share/TAM penetration in 5 years/10 years to generate 7-8% IRR?
The more narrow and more precise predictions required, the lesser the margin of safety.
The more narrow and more precise predictions required, the lesser the margin of safety.
5/6 Resilient balance sheet is perhaps the best possible of margin of safety for long-term investors.
The very essence of margin of safety is the future is unknowable and hence unpredictable which is why we would like some buffer. A resilient balance sheet provides exactly that.
The very essence of margin of safety is the future is unknowable and hence unpredictable which is why we would like some buffer. A resilient balance sheet provides exactly that.
6/6 Despite our earnest attempts, most of our investments are destined to generate uncompelling returns.
For most long-only long-term investors, it's not the batting average, but the slugging ratio that makes all the difference.
For most long-only long-term investors, it's not the batting average, but the slugging ratio that makes all the difference.
