Highlights

THE INVESTMENT APPROACH OF CALVIN TAN

Author: calvintaneng   |   Latest post: Sun, 16 Sep 2018, 01:03 PM

 

Margin of safety (financial) WHY GRAHAM & DODD want margin of safety for investments {Calvin Tan Research comment)

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Margin of safety (safety margin) is the difference between the intrinsic value of a stock and its market price.

Another definition: In Break even analysis (accounting), margin of safety is how much output or sales level can fall before a business reaches its breakeven point.  (FROM WIKIPEDIA)

 

History[edit]

Benjamin Graham and David Dodd, founders of value investing, coined the term margin of safety in their seminal 1934 book, Security Analysis. The term is also described in Graham's The Intelligent Investor. Graham said that "the margin of safety is always dependent on the price paid" (The Intelligent Investor, Benjamin Graham, HarperBusiness Essentials, 2003).

Application to investing[edit]

Using margin of safety, one should buy a stock when it is worth more than its price on the market. This is the central thesis of value investing philosophy which espouses preservation of capital as its first rule of investing. Benjamin Graham suggested to look at unpopular or neglected companies with low P/E and P/B ratios. One should also analyze financial statements and footnotes to understand whether companies have hidden assets (e.g., investments in other companies) that are potentially unnoticed by the market.

The margin of safety protects the investor from both poor decisions and downturns in the market. Because fair value is difficult to accurately compute, the margin of safety gives the investor room for investing.

A common interpretation of margin of safety is how far below intrinsic value one is paying for a stock. For high quality issues, value investors typically want to pay 90 cents for a dollar (90% of intrinsic value) while more speculative stocks should be purchased for up to a 50 percent discount to intrinsic value (pay 50 cents for a dollar).[1]

Application to accounting[edit]

In accounting parlance, margin of safety is the difference between the expected (or actual) sales level and the breakeven sales level. It can be expressed in the equation form as follows:

Margin of Safety = Expected (or) Actual Sales Level (quantity or dollar amount) - Breakeven sales Level (quantity or dollar amount)

The measure is especially useful in situations where large portions of a company's sales are at risk, such as when they are tied up in a single customer contract that may be canceled.[2]

Formula[edit]

Margin of Safety = Budgeted Sales - Breakeven Sales

To express it as a percentage, the Margin of Safety needs to be divided by Budgeted sales.[3]

 

 

Calvin comments:

 

Great Sifu Benjamin Graham first coined the words "MARGIN OF SAFETY " in Investments

 

Using margin of safety, one should buy a stock when it is worth more than its price on the market

 

That means that we should only pay for a Share when Its NET NET VALUE is more than the Price We Pay.

 

This is different from Over Paying For Something with the Expectation that we Will Make More Money later.

 

SO VALUE NET NET INVESTING IS BASED ON PRESENT VALUE AS OPPOSED TO FUTURE VALUE.

 

Of Course Stocks With Moat  like Coca Cola, Nestle, McDonald are now selling above Net Net Value.

 

Where is their Margin of Safety. In this case it is their Branding & Business Model which is unassailable.

 

Take Milo for example. It is the no. one beverage after coffee & tea. Now there may be many brands of Tea or Coffee. BUT THERE IS ONLY ONE MILO UNDER TRADEMARK BY NESTLE. And Milo captures 90% of the market. The rest is Vico, Ovalteen & Others. 

 

So the MARGIN OF SAFETY DOES NOT REST ON NTA BUT ON THE ESTABLISHED CUSTOMER BASE WHICH IS ENTRENCHED IN THE TASTE BUD OF MALAYSIANS

 

Now For Nestle It is Now Too Expensive to Chase.

 

You must know that Nestle has only a Limited Geographical Market in West Malaysia, Sabah & Sarawak. Singapore has its own brand of Milo (Australia Formula without Palm Oil).

 

Again there is the Real Australian Brand of Milo sold in Australia which is different from Spore's Australia Formula.

 

So just as trees cannot growth until the Sky you can overpay for a stock.

 

Ok, now We Come Back To NET NET & NET NET ALONE.

 

Ben Graham advocates buying a Stock with at least 30% Discount to NTA

 

Why?

 

BECAUSE THIS IS THE RESERVE FOR UNEXPECTED EVENTS WHICH MIGHT CAUSE THE NORMAL FUNCTION OF BUSINESS TO SHUT DOWN FOR A TIME. A FIRE? A SUDDEN TURN OF EVENT.

THE MARGIN OF SAFETY IS TO RIDE OUT THE DANGER

 

Like what?

 

1) Like Having A Spare Tyre Well Inflated if you travel Long Journey

 

2) Like having a Life Jacket if you go out to Sea for fishing

 

3) Like Extra Cans of Petrol if you travel through places where there is no gas or petrol station

 

4) Like having Airbag & ABS Brake if you drive High Performance Car at Top Speed

 

5) Like Having Parachutes if you are up in Airplanes or Helicopters

 

6) Like not driving but take a taxi if you happen to get drunk (drinking is bad)

 

7) Like My Friend My Dr Lim the Heart Surgeon. Dr. Lim operates open heart surgery. He wears a latex glove. But Dr. Lim told me sometime after operating on the human heart he would notice that there is a small cut in the rubber glove during cleaning up.

 

So Dr. Lim told me as a Margin of Safety He Wears Not One, But Two Rubber Gloves Instead just as an added Margin of Safety. As HIV could infect even a Surgeon through cuts.

 

8) So in the Stock Market WE NEED TO INVEST WITH A MARGIN OF SAFETY.

So many failed because of this neglect.

 

9) Sifu Warren Buffet (the Best Disciple of Ben Graham) coined these words

 

Remember the First Rule Of Investment

 

1) NEVER TO LOSE MONEY

 

2) AND THE SECOND RULE IS TO REMEMBER THE FIRST RULE: NEVER TO LOSE MONEY

 

YES!!!

 

MARGIN OF SAFETY. Remember these Words & You Shall Be Safe

 

Warm Regards

 

Calvin Tan Research, Singapore

 

Note: Those who invest or punt loosely will in the end lose out!

 

Further Note From Sifu Ben's Words

 

One should also analyze financial statements and footnotes to understand whether companies have hidden assets (e.g., investments in other companies) that are potentially unnoticed by the market.

 

Coming up next:

 

THE REASON WHY TA HAS DOUBLE MARGIN OF SAFETY

 

MARGIN OF SAFETY NO. ONE

TA OWNS TAGB (ITS VALUE EQUALS TAGB SHARES ALONE. ALL THE REST FREE>)

 

MARGIN OF SAFETY NO. TWO

TAGB OWNS ASSETS & INVESTMENTS

THESE COULD BE LIQUIDATED IN EMERGENCIES AS A FORM OF DEFENSE

 

Calvin will explain Its Intrinsic Hidden Value later

 

Stay tuned...

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  Patrick13 likes this.
 
kasinathan Calvin bj,

the margin of safety in built in your recommended stock like bjcorp have got no safety margin at all. i follow you since 2013 when you valued bjcorp at rm10 when the price at 55 cents.

After 5 years...bjcorp down to below 35 cents. Is this the so called margin of safety?

You better keep doing with your bj
14/03/2018 06:26
3iii Calvin

You are obviously well read.

But when it comes to stock selection, you seem incapable of implementing this margin of safety principle.

Margin of safety principle is best when applied wholly to the quality of the business and the management too and not just focusing on price alone.

Thus, the 3 questions raised are:

Does the quality of the business gives me a margin of safety?

Does the quality and integrity of the management gives me a margin of safety?

Does the market price relative to its intrinsic value gives me a margin of safety?

Buffett's rule no 1 is: Do not lose money.

Graham emphasized this too, as you rightly pointed out. The most important thing in investing is preservation of your capital (same as Buffett's rule no 1) and then a satisfactory raye of return from that investment.
14/03/2018 07:03
alex lol this Calvin know shit. his investment tactic is buy when a share price drop like mad already and always see nta
14/03/2018 07:04
calvintaneng Good morning all,

Kasinathan,

OVER TIME I THINK BJ CORP WILL STILL MOVE UP IN PRICE WHEN ASSETS ARE DISPOSED TO REFLECT ITS TRUE VALUE.

SO JUST WAIT.

3iii

Yes,
Quality of business
Quality and integrity of management
Quality of Assets

are criteria for MARGIN OF SAFETY

BUT AS BEN HAS MANY DISCIPLES CHOSING TO FOCUS ON ALL THREE OR JUST ONE OF THE THREE.

I CHOSE WALTER SCHLOSS WHO ZERO IN ON NUMBER THREE......QUALITY OF ASSETS COME FIRST. AND MOST OF THESE WITH QUALITY OF ASSETS SELLING AT UNRECOGNISED VALUE ARE USUALLY TAKEN PRIVATE.


traderman,

you are correct

I love to buy Value Stock when price dropped like shit

How else would i have spotted jaks at 40 sen, Prestar at 46 sen, masteel at 66 sen, wangzng at 75 sen, dutaland at 39.5 sen, kpscb at 44 sen, insas at 66 sen, pohuat at 50 sen_after split, myeg at rm1.00 after spilt and these chun chun ones taken private. .. super enterprize, kulim, tmakmur ,thestore, weida and wangzng
14/03/2018 09:49
calvintaneng FOR NESTLE MALAYSIA PRICE HAS NOW OVERSHOT ON THE UPSIDE

MALAYSIA NESTLE HAS A MARKET OF 31 MILLIONS POPULATION IN MALAYSIA.

AUSTRALIA NESTLE DOES NOT HAVE PALM OIL SO IS OTHER COUNTRIES.

HOW MUCH 31 MILLION PEOPLE COULD GIVE THE TOTAL PROFITS TO NESTLE?

AND HAS THE PRICE RUN AHEAD OF ALL FUTURE PROFITS?

WHY NESTLE IS A GOOD STOCK IT COULD ALSO BE OVERPRICED BY THE MARKET

SO BE VERY CAREFUL NOT TO CHASE TOO HIGH.
14/03/2018 10:32
calvintaneng Now Saigon fell in Year 1975 during the Vietnam War

Let's use Margin of Safety in that Crisis time.

Let's put these 3 to the test

1. Quality of business
No more business as North Vietnam has overthrown South Vietnam.
So communism is taking over. Capitalism over for that time.

2. Quality of management.
No more. As managers are scambling to flee by all means. Many ended up as Viet Refugee Boat people fleeing to Malaysia, Singapore, Indonesia and Australia

3. Quality of Assets
Ha! This is the only one left.
Now there are different types of assets
Those who owned houses and lands left them behing.
Viet Dong? No use as Malaysia and Spore won't accept it then.
Usd? Yes. Everyone who has Usd can take it with them in the boat. Physical gold or jewelery? Yes. These are portable.

Cars, businesses, factories?
Nothing could be salvaged.

I met the Viet Boat people in Singapore in year 1970s.

One guy told me he has 12 cars in Vietnam which he left behind. On high seas they ran out of water. So they drank urine.

Sordid stories of people turning to cannibalism were wispered.

Those were terrible times!

So Margin Of Safety is really in

USD DOLLARS
GOLD OR PRECIOUS METALS OR JEWELERY
SMALL ARTICLES THAT COULD BE TRANSPORTRD OUT IN HASTE.


NOW THAT IS WHY ASSETS OF VALUE AS A MARGIN OF SAFETY IS PARAMOUNT
14/03/2018 10:43
Jon Choivo Got so many companies with way larger margin of safety on an NTA basis other than TAGB.
14/03/2018 10:45
joetay clown calvintaneng, if u bs so much abt margin of safety, then why r 6 out of 7 stock buy calls u gave since start of the yr is in red, with 3 in deep red????

really is slapping ur own face and exposing ur stupidity.

lol...............
14/03/2018 10:47
kasinathan calvin,

just wait? another 5 years?
14/03/2018 11:06
calvintaneng HOHOHO!!!
14/03/2018 11:17
calvintaneng See in a Tsunami

1) Management no use as they are swept away!

2) Business also in danger as Customers are swept Away!!

3) ONLY ASSETS LIKE STRONG BUILDING STANDING FIRM

WATCH

https://www.youtube.com/watch?v=Uhe36Co4ayo

https://www.youtube.com/watch?v=PQ0SFbiDrSk
15/03/2018 00:24


 

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