Marcus A. Turner
Advisor & Author
Within the world of value investing, there is a term that was made famous by Benjamin Graham and Warren Buffet called the "Margin of Safety." It is the difference between the intrinsic value of a stock and its market price. Another definition: In break-even analysis, from the discipline of accounting, the margin of safety is how much output or sales level can fall before a business reaches its break-even point. At its core, this term is a practical way of evaluating risk vs. reward. For example, if I was driving a truck with 7,000 pounds of cargo, and I approached a bridge with a weight capacity of 10,000 pounds. And there was an alternative route that would take me 10 miles out of the way, but I wouldn't have a bridge to cross. Should I cross that bridge? Well, I would need more information because the margin of safety at this point is 3,000 pounds. Therefore, I would need to know my truck's weight, which is 2000 pounds, and the bridge's age. If the bridge is 30 years old with a 10,000-pound capacity, my truck and cargo's total weight is 9,000 pounds, then the margin of safety is too small. One would have to conclude that over 30 years, there would have had to be a considerable amount of wear and tear on that bridge. Could it still bear 10,000 pounds? Who knows, but I wouldn't be the one to find out. Therefore, I would drive the additional 10 miles out of the way.
The risk versus the reward is out of alignment. The formula or equation for calculating the margin of safety is [ Margin of Safety = Total Budget or actual Sales - Break-even sales]. In terms of percentages, it is calculated by subtracting the break-even point amount from the real or budgeted sales and then divide by sales. When we are investing, we must be careful to carry these practices forward. Many fail to see the parallels between investing and life, but I believe the margin of safety is a great concept to connect the two. What is the margin of safety in marrying a particular individual or taking a new job, moving to a new city, etc.? Hopefully, we are beginning to realize that this is not just an investment principle but also a way of life.
If I am living during a once in several lifetimes pandemic, and I had doctors and scientists who were providing information on the health risk and the death rate associated with this infection; versus the information given by a real estate developer, brander, and reality TV star. Who now is President, that spent the past three years gaslighting the American people. What is the margin of safety between adhering to someone's advice in their field of study versus someone who has no expertise? Let's go one step further; if you were told by scientists, doctors, and other medical professionals, wearing a mask in public has been shown to reduce your ability to contract or transmit COVID 19 by 80%. Therefore saving yourself and others from severe illness or death; versus ignoring the advice, refusing to wear the mask, associating it with being weak, calling it a hoax, and advised people on national TV to drink bleach and introduce bright light inside our bodies? Would you wear a mask in public? What is the margin of safety? The risk of listening to the untrained versus the rewards of adhering to the experts' instructions are too great. I would choose advice and protection soberly because the alternative continues to cost us lives recklessly, not for healing but for division, hate, and ignorance. As Dr. King noted: "The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy... There comes a time when one must take a position that is neither safe, nor politic, nor popular, but he must take it because conscience tells him it is right. Nothing in the world is more dangerous than sincere ignorance and conscientious stupidity."
I believed Jesus understood the term, the margin of safety. In Luke 14:28, He notes: "For which one of you, when he wants to build a watchtower [for his guards], does not first sit down and calculate the cost, to see if he has enough to finish it? Otherwise, when he has laid a foundation and cannot finish [the building], all who see it will begin to ridicule him, saying, 'This man began to build and was not able to finish!' Or what king, when he sets out to meet another king in battle, will not first sit down and consider whether he is strong enough with ten thousand men to encounter the one who is coming against him with twenty thousand? Or else [if he feels he is not powerful enough], while the other [king] is still a far distance away, he sends an envoy and asks for terms of peace."
We must find that margin of safety for every choice we make, even when it's for a righteous cause. Jesus didn't die recklessly, nor for a lower evil, but a higher good. He died so that we wouldn't have to. We must count up the cost to see whether the next move is a worthy endeavor. I believe this is the root issue of our society today. We tend to do what feels good, what comes easy, without any practical reflection or calculation. It's wise choices, not foolish acts. In life, the most important things require deliberation and consideration because they will cost you something. No matter how good it looks, before you jump, find the margin of safety, or as Jesus would say, count up the cost. The right behavior in making choices in life is the same when choosing an investment. After all, life is the ultimate investment where we must receive a reasonable return.
