I thought that since this is such an important book and such an important concept to grasp correctly to be an intelligent investor, i would add some constructive words to what has been written here.

My issue is with the following summary …

“Graham sums this up in one concept: the “margin of safety.” Simply put, it’s the idea that a company has established such a stable business that the company can succeed through many environmental changes. The economy goes up or it goes down – either way, the company is safe and stable. Competitors come and competitors go – the company survives. Management changes – the company rolls right through it.

Companies that have established themselves with such steadiness are the real value stocks.

…

This to me is completely missing the point that Benjamin Graham makes quite clearly. What I believe is being described above is finding a company that has a sustainable competitive advantage. This is what Buffet, Munger and others (such as Lynch) have really focused heavily on. However “Margin of safety” is a separate, albeit related, and very concrete concept. It is that the investor places a valuation on a company and then pays less than that valuation by a substantial margin (of safety). This concept can be applied to a diverse array of investments and the method of arriving at a valuation can vary too. Put another way, a super solid franchise with all of the competitive advantages alluded to, if selling at an inordinately high price, is a *BAD INVESTMENT*. This is exactly the point Graham is trying to make, so i believe this is really a key. Some value investors hunt down really deep value NTA type plays where the company is going broke and liquidation is almost guaranteed. They simply demand a much larger margin of safety and possibly diversify a little more. Another issue I have is the conclusion that Graham is implying that wide diversification is in effect a margin of safety. It is not, so much as diversification gone too far can draw an investor’s attention away from objectively arriving at a valuation and trying to really understand the nature of a business assets and liabilities. Sure some diversification coupled with margin of safety is probably a risk mitigation bonus, but mixing the concept of margin of safety with diversification is confusing the issue.

Weather you buy a house, a stock, a bond or some gold… the fundamental principle of margin of safety can be applied, and it is simply to put a valuation on the asset, then play less than this valuation by some safe margin. Period.

Indeed, Graham actually favors the kinds of valuations where investors do not try to place too much value on future growth (e.g. the long term competitive advantage / moat type investing) and prefers to look at current earnings as if they remained constant into the future. Also he places emphasis on not using current years earnings only but also on average of previous few years. All this is to be as conservative as possible (e.g. more margin of safety).

Please don’t get me wrong, i’m not saying that looking for a durable competitive advantage is wrong, i’m just saying that the concept of margin of safety is more holistic than looking for this particular quality. Also often these moats are used within valuations to project earnings *growth* into the future, and I think this has stung many of us. Also another thing Graham does not really push.

Regards,
andyc

Less well known is that Buffett has also often said that much of the value of this book is contained in chapters 8 and 20.

Thus, today’s review represents the absolute cream of the crop in general investment wisdom.

I look forward with some anticipation to see what you roll out next Friday. Will it be a new book or something completely different?

I would say this means exactly what it says. In bull markets, stocks as a whole are up – including lower quality securities. In bear markets, lower quality securities might be even more depressed than the market as a whole, and might represent some sort of bargain. So the worst thing you can possibly buy are low-quality securities in a bull market.