We all have faced situations in life where our decisions have gone wrong. Be it personal or professional life, our assumption are proven erroneous and the outcome is different from what we had anticipated. Stock investing is no different!
We can never be certain that the stock, which we have selected with significant hard work, would always go up in price. No one can assure us that the company, which the stock represents, would keep on growing the way it did in the past. All these elements bring an aspect of risk in investing.
The risk is that the company or the market will prove an investor’s analysis wrong and instead of generating wealth from the markets, she would end up losing her hard earned money. And if not handled diligently, these errors might put her financial freedom at stake.
One of the all-time best investors, Benjamin Graham, dealt with this situation lucidly in his book “The Intelligent Investor”. Graham highlighted that no matter how careful an investor is, she can never eliminate the risk of being wrong. To tackle this situation Graham introduced the concept of “Margin of Safety” in investing.
