Understanding the basic concept of “Margin of Safety.” The premise of Margin of Safety as explained by Benjamin Graham is that a safety measure against risk is established it is substantially less than book value. The Margin of Safety could be 10 to 20 percent lower than Book Value. By establishing this benchmark a floor has been set.
An example would be were the Dow Jones was in 2009 it’s lowest point before recovery was 6,900 points. A drop from over 15,000 a year earlier. The Financial Banking Crisis curtailed all gains back to reality creating the Margin of Safety needed to enter the Stock Market once again.
With 1.) interest rates at historical lows in 2009 and the 2.) Dow Jones at a multi year low plus 3.) The Federal Reserve printing money through bond buying. The climate was right to begin investing into stocks once again.
Forward to 2017 and the Dow Jones has surpassed 21,000 points on March 1, 2017 for the first time. In less than 8 years the Dow Jones has increased 200% since it’s lows in 2009. Are we on another move forward? Most likely the answer is yes! With a new Pro-Business President in Office and fiscal policies that will continue in coordination with monetary policy.
However, note that the “Margin of Safety” is getting smaller and smaller as the stock indexes and individual stocks rocket skyward to new unprecendent levels. P/E multiples are getting stretched and investors are becoming speculators. Time to be more in tune of Market Forces that can move stocks indexes positively or negatively in either direction.
Thoughts From My Desktop!
Financial – Business – Political Commentator
~ All rights reserved to the Author March 1st, 2017