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Warren Buffett’s Margin of Safety Explained (With Free Calculator)
- Warren Buffett’s “Margin of Safety” is a key investment principle rooted in value investing, originally popularized by his mentor Benjamin Graham. Here’s the definition in Buffett’s context: ” buying a good company at a price significantly below its actual value, so even if you’re wrong or something unexpected happens, your downside is limited.”
Warren Buffett’s “Margin of Safety” is a cornerstone of value investing, a principle originally championed by his mentor, Benjamin Graham.
What Does Margin of Safety Mean?
In Buffett’s context, it means buying a great company at a price significantly below its intrinsic value.
This margin gives you a cushion so even if your assumptions are slightly off or the market turns against you, your downside risk is limited.
🧮 Free Margin of Safety Calculator (Sticker Price)
To help long-term investors like you avoid overpaying, I’ve built a Margin of Safety Calculator. It estimates the intrinsic value (also known as the sticker price) of a stock and applies your selected Margin of Safety (MOS).
This helps you answer:
✅ “What is this stock truly worth?” — at 0% MOS
✅ “At what price should I buy to stay safe?” — with your chosen MOS
💡 What the Calculator Does:
- Sticker Price (Intrinsic Value) – The estimated true worth of the business
- MOS Price (Buy Price) – The discounted price that gives you a safety cushion
🔢 Inputs You’ll Need:
- EQPS – Equity Per Share growth rate (past 3, 5, or 10-year average in %)
- EPS – Current or most recent Earnings Per Share
- MOS – Your desired Margin of Safety, in %
🧠 How It Works (Valuation Method):
This calculator is based on Phil Town’s valuation approach, which aligns closely with Warren Buffett’s philosophy.
Assumptions:
- Future P/E ratio is estimated as 2x the EPS growth rate (EQPS).
- Use the lower of:
- Historical EPS growth rate (doubled)
- Analyst/professional growth estimate (optional – not used here)
👉 This version of the calculator defaults to 2x the historical EPS growth rate (EQPS).
Quick illustration:
Ticker: GOOGL
Shareholder equity:
2024: 325.08 billion
2023: 283.38
2022: 256.14
2021: 251.64
2020: 222.54
2019: 201.44
2018: 177.63
2017: 152.5
Diluted avg. share:
2024: 12.45 billion
2023: 12.72
2022: 13.16
2021: 13.55
2020: 13.74
2019: 13.97
2018: 14.07
2017: 14.07
Equity per share growth rate:
1 year (2023-2024): 17.2%
5years (2019-2024): 12.6%
7 years (2017-2024): 13.4%
Earning per share at 2024: 8.26
I use 5 years 12.6% – not using 1 year growth of 17.2%, but I am comfortable with Google growing at 12.6% in next 10 years.
Plug in these values in valuation tool:
- EQPS: 12.6%
- Current EPS: 8.26
- MOS: 50%
Sticker price with MOS: USD 87.52/share. Thus, current price of GOOGL of USD 240/share (Sep 15th 2025) is overvalued (based on above 12.6%).
To calculate the Compound Annual Growth Rate (CAGR), use the formula:
(Ending Value / Beginning Value)^(1 / Number of Years) – 1.
You then convert the resulting decimal into a percentage by multiplying by 100 to see the annualized growth rate, which takes into account the effect of compounding over the specified period.
For 5 years (2019-2024): ((26.11/14.42)^(1/5)-1)*100 =12.6%
🧪 Why This Matters
Using a Margin of Safety helps investors like you:
- Avoid overpaying for great businesses
- Sleep better knowing your investments are backed by rational assumptions
- Invest with confidence, even during market downturns
2 thoughts on “Valuation Tool”
Ive learnt alot from reading all the posts here, about how to go about company valuation and the importance of reading blocks and being strict about my own checklist. I feel this is a good guide for anyone starting out as it covers extensive concepts in basic terms. Appreciate your Guide
Thank you for your feedback. Glad to know it helps and provides value to you. Happy building FI!