The Daily Buffett

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The Safety of Wisdom

December 15th

The three most important words in investing are margin of safety.

Warren Buffett

In investing, the principle of a 'margin of safety' acts as a buffer against the unpredictability and fluctuations of the markets. It's the gap between an asset's intrinsic value and its market price, a cushion that helps guard against investment losses. It's not about chasing the highest returns, but minimizing potential risk.

Take a moment and consider not just the times you've ensured a margin of safety, but also when you've ventured outside your circle of competence. Investing in areas without full understanding, or letting emotions sway your decisions—these are moments of jeopardizing that safety margin. This principle is not just about risk mitigation; it underscores the importance of sticking to what you know and acknowledging limitations.

So as investors, strive for a margin of safety in your portfolios. Knowledge is crucial, but recognizing what we don’t know carries equal weight. And while the first rule of investing is to never lose money, the second rule is never forgetting the first.

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