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Margin of Safety

Mental Model #6 — Charlie Munger / Benjamin Graham
The core principle
Never build a bridge rated exactly for the load you plan to carry
Actual load: 10t Margin: +5t Rated: 15t expected buffer capacity The gap between what you expect and what you can handle is your safety
With margin vs without
With margin of safety
Without margin of safety
Where the principle appears
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Engineering
Elevator rated for 10 people; engineers design for 20. The extra capacity absorbs unknowns.
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Value investing
Pay 50¢ for every $1 of intrinsic value. Mistakes in analysis still leave room for profit.
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Daily planning
Leave for airport 90 min early when 45 min suffices. Buffer absorbs traffic, lines, surprises.
Munger on the concept
"You have to have a margin of safety. You don't drive a 9,800-pound truck over a bridge rated for 10,000 pounds just because the expected weight is 9,800 pounds."
— Charlie Munger, Poor Charlie's Almanack
Calibrating your margin
Too conservative Optimal zone No margin (reckless)
Miss all opportunities
High uncertainty → bigger margin
Betting on precision