In this presentation with Indiana University MBA and MsF students, Vitaliy Katsenelson takes a deep dive into his approach to investing, including how to think about margin of safety. Here’s an excerpt from the presentation:
In my firm this is a very important mental model. You can modify the hell out of it but, it’s actually a very important mental model.
When you look for how much margin of safety required from a company, one of the most important factors should be the company’s quality.
The higher the quality of the company the less margin of safety required. Think about it, if you’re buying a company which has a very predictable, stable… like when you buy Walmart hypothetically it has an incredibly stable and predictable business. This is a huge moat. Great balance sheet right.
For Walmart you don’t need as much margin of safety because fewer things will go wrong, and then you look at another company in that space that has maybe a lot more debt, more fashion in their business, and there you need a lot more margin of safety because there are a lot more things can go wrong.
Because margin of safety, all it does it protects you from the future being not as good as you think it would be. So the future of a high quality company, the deviation from the future, in your expectations probably is not going to be as great. Again I’m generalizing, but I’m giving you a mental model here.
Where deviation for a future is a low quality company, the outcomes could be very very wide so that’s how I would approach that.
You can watch the entire presentation here:
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