The Margin of Safety Principle and Corporate Strategy

Abstract

Purpose – This paper analyzes the applicability of the time-tested margin of safety principle from value investing to corporate strategy.

Design/methodology/approach – The main source of this paper is the book "Margin of Safety" (NY: HarperBusiness, 1991); supplementation materials, including a discussion with the book’s author, Seth Klarman, were also referenced.

Findings – The margin of safety principle is broadly applicable to corporate strategy in areas such as M&A, hedging, balance sheet management, share buybacks, special dividends, divestments, and cash management. Each of these areas is discussed in the paper and illustrated by way of timely examples as part of the analysis.

Research limitations/implications – Further research could be conducted into valuation methods in general, including the method practiced by noted value investors. Research could also be conducted into the margin of safety principle and its applications in corporate strategy, corporate finance, strategic risk management, shareholder communications, and operations management.

Originality/value – This is the first paper that we are aware of that analyzes the applicability of the investment-based margin of safety principle to corporate strategy and strategy-related initiatives.

Keywords: investment, margin of safety, corporate strategy, value creation

JEL Classification: G30, G34, M20