During this interview at the Morningstar India Conference, Mohnish Pabrai explained why the margin of safety is the free lunch in investing. Here’s an excerpt from the interview:
Host: In terms of your investing with a margin of safety do you have any sort of guidelines or rules around that? Seth Klarman has sort of explicit views about that. Can you just give us some perspective on buying an asset with a margin of safety.
Pabrai: Yeah I think what happens is that you get a free lunch. So if you buy a dollar bill for forty cents, or thirty cents, or maybe nowadays twenty cents there are two things that happen to you.
One is that the odds that you lose money go way down. And the second is your upside goes way up.
Like they say in the Miller commercial it tastes great and is less filling. And so I think basically we don’t get very many free lunches in investing but if you can reduce your downside while at the same time increasing the upside that’s what you get with a margin of safety.
You can watch the entire discussion here:
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