Discover more from Unknown Unknowns
Margin of Safety
To have a margin of safety means to prepare for a harsher scenario than you might expect. In finance, it means buying an asset for a lower price than you value the asset. That means that you have a buffer in case you’re wrong.
Margin of safety is relevant in all our dealings in life. Generally, the more you know about a topic, you need a smaller margin of safety because you can anticipate downsides more easily.
But more important than knowing something is knowing how much you know something. Overestimating your knowledge is the worst case because you will think you need a smaller margin of safety than you actually do. If you don’t know anything and know you don’t know anything, you’ll have a huge margin of safety or won’t even do it. But if you think you know more than you actually do, you’ll take risks without even knowing it.
"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so" - Mark Twain