Margin of safety
How much room should you keep between an estimate and the price you act on, so being wrong stays survivable?
In plain words
A margin of safety is a deliberate gap left between an estimate of what an asset is worth and the price paid or the size taken. The gap absorbs errors: if the estimate turns out to be too high, the position still has a cushion before it turns into a loss.
Why it matters
Every estimate is uncertain, and markets move for reasons nobody priced in. A margin of safety converts a wrong estimate into a smaller, survivable error instead of a forced exit. Without it, ordinary price swings — not a broken thesis — can end a position, because the buffer that would have absorbed them was never there.
In a real week: ETH, week of 18 March 2019
In the week of 18 March 2019, ETH opened at 138.67 and closed at 136.09, a return of -1.86%. Its high-to-low range was 8.23%, from a high of 142.01 (Mon 01:00 UTC) to a low of 131.21 (Thu 14:00 UTC), with a largest 1-hour move of -3.72% and realised volatility of 43.0% annualised. ETH sat 83.79% below its 52-week high. A cushion sized at that 8.23% high-to-low range would have been larger than the -3.72% largest hourly move, the order of swing such a gap is meant to absorb.
A common mistake
Treating the margin as a guarantee that the estimate is correct. It only bounds the damage from being wrong; it does not make the estimate right, and a gap sized far below normal volatility is no buffer at all.