Margin of Safety

QUOTE

Warren Buffet once said…

“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

CONCEPT

Margin of Safety

Margin of Safety is a principle that emerges from the world of investing but has broader applications in decision-making and risk assessment. At its core, it represents the difference between the intrinsic value of something and its market price.

When making an investment, the margin of safety ensures that there's a buffer between what you perceive to be the value and the price you're willing to pay. This buffer acts as a protection against unforeseen adverse events or mistakes in the valuation.

Beyond finance, it can be seen as a philosophy of always having a backup, or not stretching oneself too thin, to account for uncertainties.

STORY

Engines Down ... Hudson Bound?

January 15, 2009, started like any other day for the 155 passengers aboard US Airways Flight 1549. But moments after takeoff from New York City's LaGuardia Airport, a flock of Canada geese collided with the plane, causing both engines to fail.

Piloting the aircraft was Captain Chesley "Sully" Sullenberger, a veteran pilot with 40 years of flying experience. With the Hudson River below and no power in the engines, Sully had to make a split-second decision.

He realized that returning to LaGuardia or attempting to land at nearby Teterboro Airport in New Jersey was too risky. The margin for error was too slim. Instead, he opted to “land” the aircraft in the Hudson River.

It was a choice that demanded an understanding of his current situation and the risks involved—a direct application of the "Margin of Safety" concept, albeit in a non-financial context. Rather than risk an uncertain landing on concrete—which might have had catastrophic consequences—he chose the Hudson River, where the chances of survival were significantly higher.

The result? All 155 passengers and crew were safely evacuated from the plane as it floated on the Hudson, with boats and ferries rushing to the rescue.

The event became known as the "Miracle on the Hudson," with Sully hailed as a national hero. In later interviews and testimonies, Captain Sullenberger cited his training, experience, and quick thinking as the keys to the successful water landing.

Central to those decisions was an intuitive understanding of the "Margin of Safety." By recognizing the potential outcomes and choosing the path with the best chances of survival, Sully ensured the safety of everyone on board.