"Margin of Safety" Investment Stack

The three most important words for investing are "margin of safety." Benjamin Graham, who coined this phrase was essentially focused on the investment itself. For example, he liked an stock investment which cost less than the actual net cash of the underlying investment. This "tangible" value approach to investing was a way to preserve value through such disruptions as the Great Depression. Since then, the world has evolved away from "tangibles" to "intangibles" but the underlying principle has not changed.

Yet within investing there are several layers which create an "investment stack." The investment stack at the most fundamental is the business itself. There are a wide variety of estimating the the values, but the principle is to pay less than the value of the investment by a "margin of safety." In today's world, this is increasingly difficult and requires some conviction about the ability for rates to stay lower for longer.

The next level within the investment stack is at the portfolio level. This involves an asset class decision, such as an appropriate amount of cash, bonds and stocks. At this level, the portfolio has to exhibit a "margin of safety" so that the volatility of the portfolio performs adequately against required draw rates.

The final level within the investment stack is at the investor level. The investor is likely to experience changed requirements, such as those related to healthcare or other issues, as well as psychological issues during periods of extreme duress. If an investor is likely to get caught up in larger societal reactivity, the investor needs a "margin of safety" to address this. Reason does not win when faced with the overwhelming power of emotions. Here Socrates gave the two most important words "know thyself." 

When a "margin of safety" is the principle of construction at each level of the stack, the investment process is likely to be enjoyable as well as profitable.