Dhandho 401: Margin of Safety—Always!
This chapter emphasises the significance of purchasing investments with a decent margin of safety only. He uses Buffett's quote to back up this point:
"Make sure that you are buying a business for way less than you think it is conservatively worth."
He also relates to Ben Graham's writing in the book ‘The Intelligent Investor’ by pointing out that Graham talked about the following joint benefits of utilizing a margin of safety: lower downside risk and greater upside potential.
The entrepreneurs depicted at the beginning of this book had likely never read Graham's writings. However, their decisions were always taken by keeping the idea of risk minimization in mind. On the other hand, Business schools do a great injustice to their students by teaching that reward comes from risk.
The impression that higher rewards can be gained through higher risk only is a common idea for those who think that the market is efficient. Hence it does no good to look for low-risk, high-reward situations. On this subject, the author once again quotes Buffett:
"We are enormously indebted to those academics: what could be more advantageous in an intellectual contest - whether it be a bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?"