Margin of safety

In 1972, Ben Graham gave a lecture and summarised the concept of margin of safety. It is the difference between the percentage rate of the earnings on the stock on the price you pay for it and the rate of interest in bonds and that margin of safety is the difference which would absorb unsatisfactory developments. If a company was selling at a PE of 11, the earnings yield would be 1/11 which is 9% while a bond yield of 10 year maturity is 4 %. Here in this case, the margin of safety is (9-4)/4 x 100 = 5/4 x 100 = 125%

Also if the intrinsic value of a company is estimated to be between a $100 and $120.(The variation in intrinsic value is due to pessimistic and optimistic growth rates and variations in discount rates. Note: Intrinsic value is an approximation and not an accurate figure) And if the market value is $60 , we say that the stock has a margin of safety of (100-40)/100 x 100 = 40%. For purposes of conservatism, we should take a lower value of $100 of the intrinsic value to calculate the margin of safety.