Can A Margin of Safety That's Too Large Be A Bad Thing ?

[Shawn]

I can't remember but didn't Graham say something about a margin of safety that is too wide possibly being an issue ?

 

Here's an example....

 

Company A is worth $1 billion but the stock price falls to say $50 million because iuno Mr.Market gets depressed.

 

I've seen companies fall by as much as 90% or more before but I had one of those moments where I knew enough to have made a lot of money but didn't invest for whatever reason (and not long after these stocks would turn out being multiple baggers).

 

I've been scratching my head about this all week lol.

 

 

Can there be an issue with a margin of safety being too wide ?

[Uccmal]

scc,

 

Have a look at the financials on this one: Gencor Industries (nasdq)

 

or Benev Capital bev-tsx

 

and let me know. 

 

I held Gencor awhile until I realized it was never going to change. 

 

Never held Benett Env. 

[writser]

Interesting, I've been looking at Bennett as well. At least for that one I like that there are several other value investors involved; both passive investors with a large stake (http://www.valueinvestigator.com/en/valueinvesting/) and active investors who took over the board (http://secondcitycapital.com/funds/fund-i). So something might be happening there in the near future. The problem is that the business is losing money. The spare cash isn't really a margin of safety if nothing is changing and I don't know enough about the business / the people informed to have a qualified opinion on the chances of a takeover / merger / liquidation happening. I do have a couple of lowball bids in the market though.

 

On-topic: I don't think there is ever a "too big" margin of safety. If margin x is good, margin 2x is better :)

[Uccmal]

I have known Benett for 15 years.  When I was with GE I spoke to the founder a bit, who was ultimately turfed for bribery to US muni officials

 

Prior to that I worked in haz waste management, including an experimental soil cleaning facility.

 

The haz waste management business makes the garbage business look like it is run by angels.  Its like a free for all of theives, low end operators, and fraudsters. 

 

Benetts business operates on the principle of large, one time, heaps of soil, mostly from US municipalities.  They treat it and then dispose of it as clean fill.  As we know, US companies and municipalities are not exactly flush with cash for this sort of thing at the moment.  And unless there is a real push to treat soil for some reason, it isn't going to be a priority. 

 

I dont know what Irwin Michael sees in BEV.  Personally, I think he is in over his head.  He has gone from running a value fund to supervising one of the toughest businesses to operate in. 

 

If the intention is to close and liquidate, then ABC has badly misjudged the business.  My bet is the PQ gov't would freeze the cash the moment they got wind of the facility being closed.  If the intention is to stay in business then there is the issue of maintaining revenues.

 

Irwin would have been further ahead buying a couple of dozen Tim Hortons franchises with the money.  Even for a value investor he gets some odd ideas.

 

 

[Parsad]

Can there be an issue with a margin of safety being too wide?

 

No.  Margin of safety is just the difference between market price and your estimate of intrinsic value.  Whether that difference is ever minimized is up to the management and shareholders.  It goes one of three ways:

 

1)  Management makes poor decisions and intrinsic value comes down closer to market price.

2)  The price stays stagnant as poor decisions slowly marginalize intrinisic value...stock stays stagnant.

3)  Management, either on their own or through activism (shareholder, outside party), make the right decisions and the market eventually values the business closer to intrinsic value...be it through growth or liquidiation.

 

Cheers! 

[scorpioncapital]

Sorry to revive this but a fantastic article that is exactly about the 'Myths' and misunderstandings of Margin of Safety. One of the best I've read - http://aswathdamodaran.blogspot.ca/2016/05/dcf-myth-31-margin-of-safety-tool-for.html