Margin of Safety Calculator
Calculate the discount to intrinsic value and classify it into risk bands to determine if a stock offers sufficient downside protection.
How It Works
Margin of safety is the discount between what you believe a company is worth (intrinsic value) and what the market is asking you to pay (current price). Enter both values and the tool instantly computes the margin as a percentage and classifies it into risk bands that help you decide whether the investment offers sufficient downside protection.
The tool also calculates the dollar margin per share (your theoretical gain if the stock reaches intrinsic value) and suggests a position size based on the width of the margin. A wider margin supports a larger allocation because the downside risk is lower relative to the potential upside.
The Formula
dollarMargin = intrinsicValue - currentPrice
marginPct = (dollarMargin / intrinsicValue) × 100
priceToIntrinsic = (currentPrice / intrinsicValue) × 100
Risk Bands:
marginPct > 50% : Deep Value
marginPct >= 30% : Comfortable
marginPct >= 20% : Moderate
marginPct > 0% : Speculative
marginPct <= 0% : No Margin
Bands follow Klarman's framework for margin of safety classification.
FAQ
What is margin of safety?
Margin of safety is the difference between a stock's intrinsic value and its market price, expressed as a percentage. It represents the discount you are getting relative to what you believe the company is truly worth. A larger margin provides a cushion against errors in your valuation and adverse market moves.
Why is margin of safety important?
The concept was popularized by Benjamin Graham and Seth Klarman. It is a core principle of value investing: you buy a stock only when its market price is significantly below your estimate of intrinsic value. This discount protects you from permanent capital loss if your valuation turns out to be optimistic.
How is margin of safety calculated?
Margin of Safety % = (Intrinsic Value - Current Price) / Intrinsic Value × 100. For example, if you estimate a stock is worth $100 and it trades at $70, your margin of safety is 30%. The dollar margin is simply $100 - $70 = $30 per share.
What is a good margin of safety percentage?
There is no single correct threshold. Benjamin Graham suggested at least 33%, meaning you should only buy when the stock trades at two-thirds or less of intrinsic value. Seth Klarman advocates for seeking a margin at all times. The bands in this tool are guidelines: more conservative investors may demand a wider margin.
What does a negative margin of safety mean?
A negative margin of safety means the stock trades above your intrinsic value estimate. This does not necessarily mean the stock is overvalued: your estimate may be too conservative. However, it does mean there is no valuation-based protection. Value investors typically avoid paying above intrinsic value.
Related Tools
Pair with the Altman Z-Score to assess bankruptcy risk, or Free Cash Flow Yield to cross-check the valuation from a cash generation perspective.