Deep-Value Investing, Fundamental Risks, and the Margin of Safety

Posted: 11 Sep 2008

Date Written: September 9, 2008

Abstract

This article estimates the margin of safety for publicly traded companies. In addition to market price volatility, the model identifies three sources of fundamental risk: 1) risk that interim news may necessitate revision of an initial valuation estimate before profits can be taken; 2) uncertainty over the reliability of a value estimate; and 3) uncertainty over when market price will converge to the investor's value estimate. The model indicates that, while investors should demand margins of safety that are typically 10% to 25% of the share price, larger margins are justified for especially risky stocks.

Keywords: margin of safety, value investing, idiosyncratic volatility, convergence

JEL Classification: D52, D81, D82, G11, G12, G14

Suggested Citation

Yee, Kenton K., Deep-Value Investing, Fundamental Risks, and the Margin of Safety (September 9, 2008). Journal of Investing, Vol. 17, No. 3, pp. 35-46, Fall 2008. Available at SSRN: https://ssrn.com/abstract=1265489

Kenton K. Yee (Contact Author)

Mellon Capital Management ( email )

50 Fremont Street, #3819
San Francisco, CA 94105
United States
415-975-3565 (Phone)

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