Warren Buffett popularized Ben Graham’s notion of “Margin of Safety” when evaluating the quality of an investment. The idea is that the future is unpredictable and we have to allow for the chance that our projections may be wrong, so we need a cushion in our analysis to protect us when things don’t go according to plan. A business with high operating margins, for example, could be said to have a large margin of safety; a minor mistake in estimating costs or a temporary drop in sales won’t cause the business to swing from a profit to a loss. We can apply the same concept to the bond market.
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