Margin of Safety

Posted on 12.25.06 by StockPK Team @ 8:29 am    

One of the tenets of Benjamin Graham, the father of value investing and Warren Buffett’s mentor, was “margin of safety”. Conditions may arise in the market place where the price of a security may be purchased at a price less than even a cautious estimate of it’s intrinsic value. The greater this disparity becomes then the greater the “margin of safety”.

The price to book ratio measures the latest price of the company’s shares relative to the current shareholder’s equity. If the price to book ratio is less than 1, this implies that one is getting more than $1 of assets for every $1 invested. All things being equal it is implied that a stock with a lower book ratio should have a greater “margin of safety”

“Over extended periods of time, price and value will converge towards on another” - Benjamin Graham

Graham’s strategy did get handsome returns. All things being equal, it is just plain common sense that one would prefer to pay less for 2 securities with equal future promises.

In today’s world it is difficult to find stocks that would satisfy Graham, but we present a couple of picks which might interest him:

American pick:

Adams Golf $1.43 (ADGO:OTCBB) engages in designing, assembling, marketing, and distributing golf clubs, including drivers, fairway woods, hybrids, irons, and wedges.

Price/Book: 1.04

On May 11, 2005, ADAMS GOLF INC Files SEC form 10-Q, Quarterly Report. Reports $0.13 EPS for the first quarter ending on March 31, 2005 up from $0.10 for the previous year.

On March 31, 2005, ADAMS GOLF INC Files Annual Report. Reports $0.12 EPS for 2004 up from $0.08 for 2003.

Canadian pick:

Sino-Forest $2.76 (TRE:TSX), is involved in the growing & harvesting of eucalyptus, aspen and pine trees under long-term plantation programs in Southern China.

Price/Book: 0.81

On May 6, 2005, Sino-Forest Corporation Reports 20% Increase in Diluted Earnings Per Share in First Quarter 2005. Diluted earnings per share for the first quarter of 2005 was $0.06 compared to $0.05 for the corresponding period in 2004.

On March 22, 2005, Sino-Forest Corporation Announces Record Revenue and Net Income for Fourth Quarter and Year Ended December 31, 2004 and Restatement of Third Quarter 2004 Financial Results.