InvestorQ : Is it true that the margin of safety is more relevant in volatile markets?
Aditi Sharma made post

Is it true that the margin of safety is more relevant in volatile markets?

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Arusha Ray answered.
3 years ago
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To begin with, the margin of safety is relevant in all markets. But you are right that in a volatile market there is a much greater logic to focusing on the margin of safety. That is because your assumptions underlying the valuation of stocks are more likely to go wrong in a volatile market than in a stable or tepid market. In volatile markets, the margin of safety assumes added significance due to the following distinct reasons:
Most valuation models used by analysts are based on certain assumptions. While most of these assumptions are empirically tested, they could well go wrong. That is because; the past can hold a light to the future only to an extent. Beyond that is uncertainty. Hence a higher level of margin of safety will ensure that you are protected from such divergences in valuations.
We live in volatile times and there are many local and global risk factors that are beyond the control of investors and traders. Hence stock prices also tend to be volatile. For example, a business dealing with Iran may face problems due to US sanctions. A company importing from the Middle East may run into problems if the Strait of Hormuz gets blocked. Also, shifts in interest rates could change the economics of a stock and hence the intrinsic value. A higher margin of safety protects you against such vagaries.
As investors, we all tend to make mistakes. They may pertain to our estimates of the company’s potential or the ideal level of entering a stock. A higher margin of safety will ensure that even if you do make mistakes, you are better protected due to a higher margin of safety.
It is a protection against the “Unknown – Unknown”. There are some risks we are aware of and some risks we simply fail to recognize. Ben Graham referred to these risks as the “Unknown – Unknown”. These risks can be best handled by the margin of safety concept. By buying stocks deeply below their intrinsic values, your stand a better of the chance of beating the odds. Some even refer to these as the Black Swan events or events that cannot be reasonably predicted with any degree of accuracy.
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