Margin of Safety Questioned

We are all familiar with Ben Graham’s Margin of Safety theory. Its based simply on the fact that all that is required to make an adequate amount of return on invested capital is to create a margin aginst the odds of possible error and thus, based on the Law of Averages, one will return a consistant profit. The general theory of Graham is to buy depreciated securities at a discount of 33%, hence when the odds are 2/3 in your favor.

But one may question, 2/3? It would seem that the enterprising investor would be willing to allocate more of his time and effort in adding a more sufficient margin to his analysis.

I found my answer in a recent rambling by Scott Adams on his Dilbert Blog. Not much of a place for the investing analyst but then again reality is pervasive throughout and therefore can and must be found and applied regardless by whichever avenue it is derived.

Adams speaks of the Golden Happiness Ratio in which he claims

You can predict how happy people are – and perhaps how successful – by their ability to tolerate imperfection. The Golden Happiness Ratio is about 4/5ths right, also known as “good enough.”

Once you achieve about 80% rightness, any extra effort is rarely worth the effort. People who can’t stop until they get to 100% are usually stressed to the point where they can barely function. And don’t expect them to do much multitasking…

For example, it might surprise you to know I’m a better artist than my comic strip indicates – about 20% better. But to reach that level consistently would double my workload and give me little in return. The art in Dilbert is, roughly speaking, “good enough.”

Based on this assumption it may be inferred why Graham was not only content but even consistent in his logic to recommend this 66% endeavor. There is always a point at which a positive turns negative, and vice versa, something of an “x-factor”.

In this context an investor must rationalize as to what an attempt to achieve 75% or 85% accuracy would facilitate. It may by some means require a greater deal of your time, an allocation that may just as easily be used for another 33% demanding far less mental application.

In other words, the high tolerance for imperfection surmounts over the necessity for achievement… and the reason why I only spent 10 minutes on this post.

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