The margin-of-safety principle assists Buffett in two ways. First, it protects him from downside price risk. If he calculates the value of a business to be only slightly higher than its per-share price, he will not buy the stock; he reasons that if the company’s intrinsic value were to dip even slightly because he misappraised future cash flow, eventually the stock price would drop, too, perhaps below what he paid for it. But if the margin between purchase price and intrinsic value is large enough, the risk of declining intrinsic value is less.
