margin of safety theory

The margin of safety theory is a risk management principle used in investing and decision-making. It involves choosing options that have a buffer between their current value and their intrinsic or true value, providing protection against errors or unforeseen events. Essentially, by investing in assets priced significantly below their estimated worth, an investor creates a safety net that reduces the risk of loss and increases the chance of favorable returns despite uncertainties. This approach encourages caution and thorough analysis to ensure that investments are made with sufficient cushion to withstand market fluctuations.