This is exactly when margin of safety comes handy
In this issue:
» Oil prices may continue to remain weak
» Why companies with dubious managements must be avoided
» Manufacturing heading back from China to US?
» Economic losses due to earthquakes
» and more!
-------------------------------------------- Free Guide -------------------------------------------- The Definitive Guide To Financial Planning
Claim Your FREE Copy Now! Click here!.
---------------------------------------------------------------------------------------------
00:00 | ![]() | |
We instead prefer to stick to the old fashioned way of relying on the 'margin of safety' for the stock. This may sound too naive as compared to the 'beta'-based calculations adopted by several investment advisors. But we believe that the margin of safety is one of the most reliable means of risk evasion. What's more, it works in the best long term interest of investors.
One of the biggest proponents of Graham's concept of margin of safety, Warren Buffett says "If you're driving a truck across a bridge that says it holds 10,000 pounds and you've got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it's over the Grand Canyon, you may feel you want a little larger margin of safety". He goes on to add "You must leave yourself an enormous margin of safety. You build a bridge that 30,000-pound trucks can go across and then you drive 10,000-pound trucks across it. That is the way I like to go across bridges."
Thus when markets react unreasonably to domestic or external factors, it is the margin of safety that long term investors can fall back on. In many ways it acts as an insurance against the most unforeseen risks. Economic and natural disasters like the latest quake in Japan reinforce this belief.
Do you look for margin of safety while investing in stocks? Let us know your views or post them on our facebook page.
01:20 | Chart of the day | |
![]() |
01:55 | ![]() | |
What soothes concerns is that the OPEC group has already eased oil supplies. But it will be a little early to count on the cartel to maintain that. We w
ould rather wait for its next meeting in June. Meanwhile, oil prices in the short term will be an interesting spectacle to watch with forces like China and Japan on one side and Middle East on the other. For India, easing oil prices could certainly be benign in the near term, given its impact on inflation and trade deficit.
02:35 | ![]() | |
For starters, it had issued FCCBs to the tune of US$ 110 m way before the global meltdown. This at a time when raising FCCBs in a bull market had become the trend. The money was raised to finance a string of acquisitions that Wockhardt made in Europe. Then at the height of the crisis, when currency volatility was at its peak, the company made some bad bets on derivative instruments. This resulted in huge losses. What exacerbated the situation was that the management refused to acknowledge such investments then. On top of that the debt steadily accumulated on its books. To such an extent that the company was unable to repay the FCCB bondholders at the time of redemption. As a result, it had to go in for debt restructuring. Moreover, the company's relationship with its bondholders has considerably soured. All this has raised a question mark over its future. Indeed, companies having questionable managements and bloated debt are those that investors should avoid investing in at all cost.
03:15 | ![]() | |
But, has growth has been broad based? Is the growth coming from an improving domestic economy? Maybe not. Companies like Cisco, Intel, Caterpillar and John Deere are seeing huge growth. These companies make products like computers, machinery, electronic equipment, trucks, construction equipment, etc. Exports have been increasing due to greater demand from emerging markets. A weaker dollar has also helped the situation. Obama's Council of Economic Advisers recently came up with an interesting study. Each additional 1% growth of another country boosts its imports from the US by 3%. Thus, it expects strong growth to come in from Mexico, and other growing economies. America, used to be, and still is, the buyer from the world. Especially from China. We are wondering whether, the tables are going to be turned.
04:00 | ![]() | |
![]() |
04:45 | Weekend investing mantra |
Today's Premium Edition.
Today being a Saturday, there is no Premium edition being published.
Recent Articles
- All Good Things Come to an End... April 8, 2020
- Why your favourite e-letter won't reach you every week day.
- A Safe Stock to Lockdown Now April 2, 2020
- The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
- One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
- A stock with strong moat is currently trading near 5-year lows.
- Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
- This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...
Equitymaster requests your view! Post a comment on "This is exactly when margin of safety comes handy". Click here!
2 Responses to "This is exactly when margin of safety comes handy"
Balakrishnan R
Mar 12, 2011This is in reference to number of earthquakes a country has faced. Russia and China are much larger countries compared to Japan. So just a number may not show the real threat. May be number of earthquakes a country has faced divided by concerned country's area may give a realistic picture. If done in such a way, may be Japan may over take everybody else. And Russia may be a very very safe place concerned to earthquake.
Parikshit
Mar 14, 2011"Why companies with dubious managements must be avoided"
The pharma company having a good core business makes a couple of wrong financial decision which lands it into deep trouble. Isnt it wrong to question the integrity of management in this case ? I mean they are good pharma guys .. bad financial managers.. thats it.