 Good day, fellow investors! On this channel we discuss a lot about the margin of safety and value investing. However, there are some issues also with the margin of safety and value investing and as a proper risk reward investment manager we have to also discuss the risk side of them. So today we'll discuss a few issues that are related to a margin of safety and value investing. Just a reminder for those who don't know what is a margin of safety. A margin of safety means that the stock price is trading at a discount to its intrinsic value due to some kind of temporary negative sentiment on the market. So an investor that looks at for a margin of safety is first concerned with risk, he doesn't want to lose money and he looks to buy something on the market that is a bargain and that has a very low possibility of capital loss. The return should come from a fair wet market valuation eventually. You never know when that can happen. As you can see on this figure the market may not correct its mistakes so the price might not move towards the value. That's the first issue with a margin of safety therefore you have to look for catalysts but issue number one. The second issue comes from the calculation of intrinsic value. You calculate your intrinsic value for a stock that can be higher or lower from the market's stock price. The problem is that each one of us would come out with a different intrinsic value because it depends on discount rates, estimations, probabilities and who knows what we can all put into that basket. Therefore again okay you always have to think I can be wrong with my intrinsic value and lower it in order to create even a margin of safety in your intrinsic value calculation. However that's more an art than a proper valuation method and you have to always be very flexible with your intrinsic value and the stock price. The problem is that we always have to make decisions in an uncertain environment. There's nothing we can do about it. The third issue is how much should that margin of safety be. Let's say we calculate our intrinsic value and let's say it's 80% of the stock price. Is a 20% margin of safety enough or we should aim for 50%? So that's again an issue with a margin of safety. Somebody who doesn't like risk would wait for 50% margin of safety. Somebody who is happy with lower margin of safety will be happy with the 20% with the 10%. So it's again a matter of personal preference. If you put 20 value investors in a room they will all have a different perception or how big the margin of safety should be. And then this leads to the next issue. If you want a large margin of safety it could lead to the fact that you don't find any interesting investments. For example, Seth Klarman is now paying back money to his investors like he did in 2010 and in 2013 because he can't find satisfying investments and his current cash position is 42%. Cash 42%. Imagine what is the cost of holding 42% of cash when the SAP 500 went up I don't know 20% in the last year or so. So that's a huge opportunity cost and that's also a cost of a margin of safety. So the larger the margin of safety is the higher is your temporary opportunity cost. The lower is your risk but you also miss out. So if you are too disciplined on that margin of safety, wanted to be large you might miss on great bull markets, great things that happen while investing. So another thing to keep in mind. The next point is margin of safety and risk. Is margin of safety a measure of risk? Risk is usually defined as volatility but also the bigger the margin of safety is the lower should be the risk. However I said at the beginning the market might never recognize what is going on with the stock that it is a bargain and the stock price could go even lower. Therefore you cannot really use a margin of safety as a measure of temporary risk. You really should know what's going on with the company and what will the company show in the long term related to news earnings improvement fundamentals that might make the company be fairly valued by the market. The final point is margin of safety and valuations. Are we looking at valuations of below 10 that will give us an earnings return of above 10% or we are looking at valuations that are lower than the average market valuation or the average valuation for the sector and thus there we find the margin of safety. So again everything is very very flexible and uncertain and that's the unfortunate thing of looking and investing through a margin of safety. It's all about your personal preferences. So the margin of safety is not a valuation method. It's mostly a mindset. You like it or you don't like it and then through time you develop your own margin of safety and the best method that fits your personal preferences. The unfortunate thing is that few investors invest the necessary years two, three, four, five years that are necessary to develop a personal margin of safety method that will lead you to satisfying risk reward returns over the very long term. People usually lose faith in a margin of safety, change investing method at the wrong point in time which leads to losses in a beer market, losses from growth stocks that don't deliver on that growth and they forget about investing because they didn't put in the time to develop a proper value investing margin of safety mindset. Thank you for watching. I'm looking forward to your comments on this very interesting topic and I'll see you in the next video.