Margin of safety is not a number
Treating it as a discount rate misses the point. It is a statement about how wrong you are allowed to be.
Chris Awoke10 July 2026 · 2-minute read
Margin of safety gets taught as arithmetic: work out what a thing is worth, pay meaningfully less. That is the mechanism, not the idea. The idea is that your estimate is wrong and you would like to survive being wrong.
Once you frame it that way, the size of the margin stops being a fixed percentage and starts being a function of how confident you should be.
Sizing it honestly
The discount should scale with the width of the range you would give if you were being truthful, not with how nervous you feel.
How well you understand it | Honest range | Margin |
|---|---|---|
You have run this kind of business | Narrow | Small |
You understand the industry, not the company | Moderate | Meaningful |
You are relying on someone else's model | Wide | Large or skip it |
Most people invert this. The margin is largest where they feel least comfortable, and comfort tracks familiarity rather than knowledge. Familiarity is not the same as understanding, and the gap between them is where losses live.
The arithmetic, for completeness
margin = 1 - (price / conservative_value) position = conviction * margin # conviction is a function of what you could be wrong about, # not of how strongly you feelThe second line is the one people skip. Sizing is where the margin of safety actually gets applied, and a large discount on a position too big to be wrong about is not safety at all.
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