How to Calculate Margin of Safety? Learn 3 Unique Methods | Ben Graham & The Intelligent Investor
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The Margin of Safety is investing's most important principle as it not only reduces the risk of investment but also improves the return. The concept was first introduced by Benjamin Graham in his book, The Intelligent Investor and then improved by successful investors like Warren Buffett, Seth Klarman, Charlie Munger and others. While everyone understands the concept, there is very little literature on how to calculate margin of safety or how to quantitatively assess its presence or absence.
In this video, I shall present three unique ways of calculating margin of safety. Like a lot of my previous videos, this is a concept that retail investors like you & me can imbibe in our stock screening & selection process thereby improving our investing decisions
👉 Video Chapters:
00:00 What is Margin of Safety?
01:33 Benjamin Graham's Method
03:11 Self-Sustainable Growth Rate (SSGR)
09:13 Free Cash Flow Method
12:28 Shankar's Viewpoint
👉 Some Useful Resources/Readings:
‣ The Intelligent Investor by Benjamin Graham (book link): amzn.to/3RH0iLC
‣ Dr. Vijay Malik's excellent post on Margin of Safety (must read) : www.drvijaymalik.com/margin-o...
‣ The SuperInvestors of Graham and Doddsville by Warren Buffett : www8.gsb.columbia.edu/article...
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#marginofsafety #theintelligentinvestor #benjamingraham
Disclaimer: I am not a SEBI registered investment advisor or research analyst. The content posted on this platform is purely for educational purposes and none of it constitutes investing or trading advice. Viewers should do their own research and diligence before investing or acting on the information presented
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Shankar I have to tell you that by simply watching your videos and then researching on and reading books written by folks you introduced such as one up on wallstreet by Peter Lynch and little book that beats the market by Joel greenblat i am able to create my own methodologies to invest. I am stress free while investing now by simply absorbing the knowledge you have shared. Thank you for another banger!!!
Thank you very much Paul. Very happy to read this note & you nailed my objective of starting this channel -- I want to be a part of and build a community of learners. Thx for being a part of it & while not all videos will be bangers, I assure you there will be something to learn, improve & adapt in most videos which'll give us that little edge in investing & in analysing other life situations
I have been involved with finance for over a year now, and after a few months of my journey I felt like everything in TH-cam or other platforms was very repetitive. You are the only creator offering very high value and expert finance content which you cannot find elsewhere. Most TH-camrs always focus on the “Beginner Investor” because that’s where the views lie, but I am glad you chose to portray more advanced investment topics/ strategies even though it has a niche audience. I can only imagine how much effort goes into your videos. Thank you for all the effort you put in and all the knowledge you selflessly share. I hope you don’t stop creating content and get all the views you deserve!
-A viewer who has been watching your videos since you were VP at ET Money
Thank you Sandeep for your kind words of encouragement. Knowledge goes through cycles and I'm certain the current flock of new-to-investing beginners will want to learn advanced concepts in the lines of what I teach on my channel. I think I'm sowing the seeds for them now .. so that when they are ready, they have cooked food to feast on.
@@shankarnath On one end, experts preach time in the market. On the other end, the same experts talk about margin of safety. But don't they contradict each other.
(1/Price to Earning) >=0.07 AND
Market Capitalization > 500 AND
(((Sales/((Net block + Net block preceding year)/2))*NPM last year * (1-Dividend Payout Ratio))-Depreciation)>Sales growth
As shown in the video by Shankar JI.
The amount of Trust i have in Shankar sir is that first i like the video and then watch. I am so confident that i will definitely learn something from the video. Thank you Shankar sir for sharing all the learnings.
So nice of you. But as the Russian proverb goes: Trust but verify .. which is why I'll always encourage to put the learnings into action and see the impact yourself.
I was about to ask for Screener formula…but you did include it in the last couple of minutes. Thanks a lot!!
You are welcome
you put a lot of hardwork in educating common folks like me....more power to you... keep up shankar!
Thank you very much Abhay
Excellent Video Shankar Sir and Dr.Vijay Malik is master of Fundamental Analysis of stocks.
Thank you very much!
I had taken Dr malik subscription earlier. Nothing to write about though but he is very knowledgeable, no question about that.
Lovely video, Dr. Vijay is a gem, great to see you referencing him
Thanks!
Dr. Vijay mallik is indeed very underrated
True. I just love his posts
Kudos, you got a new subscriber. Quality content ❤️
Welcome aboard!
To me Dr. Vijay Malik's blogs are bible to do fundamental analysis of any stock....
Recently started viewing your channel. The way of your research just awesome. It is giving new way of idea and thinking in the world of personal finance. I need a clarity on one thing which i am not getting clarified anywhere. you are the correct person to answer it. I want to invest Mutual funds for 7-10 years with 15% ROI expectation. To achieve this i want invest aggresive plans.
My choices are
1. Nifty50 index , 10yrs ROI 12.9%
2 . Technology fund , 10 yrs ROI 21.7%
3. Midcap fund , 10yrs ROI 18.9%
4 . Conservative Hybrid ( THis is for balancing and investing during market fall ) . ROI 9.3%
Allocation is 25% each. I had a doubt 4th fund to go Equity only or Conservative fund for re-investing during market fall ? By doing extra investment during market fall of 20% or more it will good to achieving the goal of 15% .
Please suggest or add some points into next videos.
Thank you very much, Sheik. I have a video on how I position my own portfolio, maybe that can help. I should mention that I don't have any big expectations like 15% ROI from this portfolio but still I think you'll find some useful info there. Link: th-cam.com/video/bN5QdxY3RVs/w-d-xo.html
Please share important books on investing concepts
Very nice
Thank you sir. Nice video
Most welcome
Thanks Shankar. Another informative presentation,,👍👌
Glad you liked it
Thank you for sharing the concept
Most welcome!
The content was very informative and refreshing
Glad to hear! Thank you Pardhu
Awesome work, Shankar ji,
I m a Finance Professor, get to learn a lot from you.
Thank you Harshwardhan ji. The world of finance is wide and deep .. we are all learning something everyday from blogs, videos, news, podcasts and even tweets.
In my view free cashflow is the most important but underrated signal of how a bus is doing.
Keep up the amazing work Shankar..
Thanks a ton
Nice illustrative video👍. Is this from any post from Dr. Vijay? Any link to the article would be appreciated. Thanks.
Thanks. I have already tagged the article in the video's description. As a practice, I add most sources and additional reading material in the description for everyone's benefit. Enjoy!
useful sir thank you
So nice of you
Hello sir, had to watch this video 3 times inorder to clearly understand the concept (probably the first two times I was not concentrating enough), but now things are much clearer. I did try to run the query and with the filters u mentioned , am getting the below list via screener.
Am not quiet sure if this is correct or if I applied something wrong with the query.
Please find my stocks below.
1. Binny
2. Manaksia
3. Shriram properties
4. Equitas small finance bank Ltd.
Glad you understood the crux of what Dr. Malik was saying. The core of the concept is the business's margin of safety. Also, good to know you applied the screener .. and atleast in my opinion, a screener does not do good justice to this concept. In my opinion, margin of safety as I explained in this video should be treated like an investing principle and not as much a stock selection rule. HUL was an example I inserted on purpose to explain how an exceedingly valuable stock might have some inherent hiccups in its business model that we might be ignoring. More work needs to be done on this topic I feel .. but thanks for going through the rigour. Hope you learnt something
@@shankarnath very much. I did feel the concept was more important than the screener . Thanks for reassuring that. Also thanks for sharing your knowledge , I have learned most of the knowledge from mutual funds , till whatever little i know about stocks mostly from you and few other channels.
Shankar thanks for your insightful videos which I am really a fan off. One suggestion for you to consider and that is proving some sharable screener for people like us to start with to understand and may be tweak here and there to understand it more about the concepts like this video. Again thanks a lot for your awesome contents .
Most welcome, Goutam. I do share screeners wherever possible. There are screeners in 6 videos so far. In 4 additional videos, I have attached excel worksheets that viewers can play around with.
@@shankarnath great thanks for sharing. Thank once again.
Very informative video👍
Good job Shankar
Thank you so much 🙂
RAN QUERY ON SCREENER - PUBLISHED AS SHANKER NATH 3 POINT FORMULA - THANK YOU SIR
Most welcome! Shankar's spelling is a bit incorrect :)
Superb learned something new
Glad to hear that
Can you please explain full video on EDELWEISS FINANCIAL LMT COMPANY
Very informative video..Happy to subscribe your channel.
Welcome aboard!
Thanks for clear explanation of Margins of Safety.
HUL has low SSGR but good CASH Flow. Should one invest in it ?
Most welcome. Apologies, I have not analyzed HUL so don't have an opinion on it
@@shankarnath You have explained about 3 methods for calculating Margin of Safety. Amongst the 3, which one is most reliable ?
Great learning 👍
Thank you, glad you found it useful
Great work Shankar
Thank you!
Margin of safety is the real cushion which we should not forget while buying a stock.
Waiting for this video sir
your presentation skills are superb
Thank you very much!
Excellent sir
Thanks!
Great video 😊😊
Thanks
Nice video
Thanks
Intriguing video as always. I looked in the screener using the parameters used here and somehow it seems to be the secret recipe for banks, state run companies, Asset management and infra companies 😂 Any idea as to why this would be the case?
Thanks.
1. The SSGR and the FCF methods are not apt for evaluating financial companies including banks and AMCs. These are applicable more for traditional manufacturing and service companies.
2. I am surprised you are receiving PSUs and infrastructure companies in your screener. Given their low sales-to-NFA and poor retention ratio, these should have been weeded out. Ofcourse, there is the cyclicity factor and if you are examining just 1 year of data then the sales and profit margins will be deceptively high which'll not present the right picture. Kindly be vary of that and as practice, pls use normalized earnings and sales numbers
@@shankarnath I was surprised too. I too believe it is the cyclical factor that brings these stocks into the list.
Really informative.
Glad you liked it. I loved it as a concept .. the "margin of safety of a business" is something I hadn't thought of.
@@shankarnath concept of ssgr was new to me. Margin of safety 🦺🙏
I have a request, since we are almost at the peak of high debt yields or mostly likely to taper down.
Folks around me tend to understand your explanations more than mine, trying to convince few of my elder relatives that they might be safer of with bonds 😇
I've recorded a video on 5 alternative fixed income investment products. I'll release it on Saturday & the objective of the video is to help people diversify their fixed income portfolio beyond debt funds or fixed deposits. Come to think of it FD, most debt funds carry the same fate i.e. interest drops, defaults, banking sector hiccups -- this video explore some opportunity areas. Hope you like it
❤
More power to you from Pakistan
Thank you!
Even i have read Dr. Vijay Malik articles. They are good. But sir the companies which you mentioned as having more cash flow are not high growth right. Sometimes too much cash flow means lack of growth opportunities.. especially for large cap IT companies
Yes Ramya Sri & that's why a screener is never my most trusted weapon, it should not be considered the brahmastra of stock selection. Every company will have pros and cons .. and growth rate, cash flow, management, valuation etc. all metrics one needs to examine
@@shankarnath true sir . Requesting you to make a video regd. Qualitative aspects of business . Especially from corporate governance point of view .. please give few points to retail investors as to which type & kind of companies to avoid
Sir if you make reels on finance your channel growth📈 will be significant
Thanks for the suggestion, Nikhil
NIIT LTD share ke bare me bataiye
Excellent again. It was good decision not to give names of stocks with margin of safery😊👍
Thanks Nabeel. Yes, the point of the video was not to give stock names but to give an understanding of the concept. I tried it on 5-6 of my stocks (not screener but actually calculated the values normalizing some of the values to account for covid years & business cycles) and the process gave me some more ideas on recognizing MOS.
👍
how averaging the growth rate is 8.9% . its coming to be 15.35
Shankar ji, please write and pin a community post listing a few books that beginner, intermediate and advanced investors should read. Topics could range from personal finance to macroeconomics. Just for us to get a better idea about how the world of finance works.
Hello Debarun - I'll try. In each of my videos, I have a section on "Some Useful Readings/Resources" where I list books, articles, websites, videos and even twitter thread which can further one's understanding of that topic. Maybe, you can start with these
i find that your videos have content which is more than a one hour lecture .
Thanks! There is a lot of preparation that goes into making these videos. It takes me 35-40 hours to produce a 15-minute piece of content i.e. time spent on researching, scripting, revising, pre-shoot planning, recording, post-production, description, thumbnail, commenting etc.
With margin of safety we reduce the downside risk, does it reduce the upside potential?
Hi, why did you think of that premise? A context will help
I think Debt Capacity Margin is also an important metric. Read an article by Bakshi Sir on it . Your view on it .....
I am sure it is
It's more of finance class then Investing. Anway's, it has valuable info which is of not my type.
Really great video sir and it would be better if you can speak in Hindi. Thank you
Thanks
What about margin of safety using PEG ratio?
Can we compare PB to that stocks historical average or median PB?
Hi,
1. How would the formula work with PEG ratio? I mean, what is the PEG ratio be compared with?
2. I haven't seen any visible benefits of comparing current PB with historical average or median PB
@@shankarnath 1. Comparing the PEG ratio with it's historical average perhaps? And comparing with industry average?
2. Noted
You are good but needs marketing skills to attract subscriber
Thank you for your feedback
SSGR measure is a suspect at best.
What are your points against it?
Try these:
PE (fair)
= D/E weighted Average(ROE,Gni,Gtotal_equity)
= (ROE+Gni+Gtotal_equity)/3 ÷ (1 + D/E)
Margin Of Safety
= [ Quoted P/E ÷ PE (fair) ] - 1
G = Growth
ni = Net Income
Namaskaram, thanks for the video.. Can you suggest stock of the month for investing purpose... I am still learning the concepts about stock market but it will take sufficient time... Also, recently I received a phone number in the message in TH-cam chat from you... Starting from +1.. I had a doubt whether it's real or fake.. otherwise u can show your phone number in the video itself to avoid the confusion. Thank you 🙏
Hello Ambedkar ji: I don't share my phone number/whatsapp details with anyone.
@@shankarnath Ok .. but be careful... Someone is trying to take advantage... If you want to know about that number, i can share the screenshot to your email..
@@ambedkarpodeti Thanks! I have enabled Spam Alert on TH-cam and changed it to "Strict" now. This will keep most spam messages out although 1-2 will creep in from time to time.
Sir,
Pls share your mail id