Identifying a margin of safety when buying shares

Having identified strong companies, it is important not to rush in and just buy shares. The market does not always price companies correctly, and we can acheive a significant advantage by watching companies carefully and buying where there is a discount to the intrinsic value.

The discount of price to value is known as the margin of safety. The higher the margin of safety, the greater the potential upside in price, and importantly, the greater the degree of possible protection on the downside if the market adjusts downwards.

We carefully determine the best stocks to buy, and will only invest if there is a sufficient margin between current share price and our valuation.

Conversely, when the price for a company’s stock has moved to a position where the stock is AT or OVER valued, then you might consider selling your stock.

At Clime we often follow companies for many years before purchasing at a discount to value. A correction doesn’t always happen immediately and it may take time, but eventually price should come into line with value.

Clime’s Fund Managers will hold stocks for long periods of time if the value to price differential persists, or can sometimes move into and out of stocks quite quickly depending on the market.

Prior to the GFC, we were largely out of stocks as we had already identified a market significantly over valued. Our portfolio bounced back rapidly following the falls as we were in a great position to move back in and buy good companies at bargain prices when the opportunity presented itself.

Our MyClime product can also help you make the right investment decisions, if you want to manage your own portfolio.

Find out more about how we can apply our successful investing methodology to help maximise your investments with Clime’s Investment Products >>