The Purpose of the Margin of Safety is to Render Forecast Unnecessary

This is Part 8 of a Series. Go to Part 7: Phil Fisher-Type Growth Company at a Ben Graham-Like Price

The following is an edited partial transcript of Alice Schroeder’s speech/lecture during the Value Investing Conference 2008 held at the Darden School of Business, University of Virginia.

Question from an Audience: I'm kind of interested in the scratch notes that you were talking about ... If someone who was very quantitatively-oriented and knows excel looked at that and put it into a model, do you think he could understand what's going on inside Warren's head when he's trying to value a company, and actually replicate that?

Alice Schroeder: There's a saying, let me call it to mind... I think it's from the Intelligent Investor: “The purpose of the margin of safety is to render forecast unnecessary.”

Yes. What you would see is a column that said sales, and a column that said expenses, and a column that said profits, and it would have Kentucky plant, Lulaville plant, Kansas City Plant, this plant, that plant, and it would have 1st quarter, 2nd quarter, 3rd quarter, 4th quarter, 1958, etc., and then it would end with the last quarter that was reported...

That's what it is.

That's all this is. And the difference from a model is that it would not add the quarters up, and it would not project anything into the future, nothing. In other words he looked at what had been reported, and he said they've earned a million in sales; they've earned this many thousands. I want this much. They earned this, I want this, can they do it? Yes/no? That's the decision.

There's a saying, let me call it to mind... I think it's from the Intelligent Investor: “The purpose of the margin of safety is to render forecast unnecessary.”

For those interested, you can see a cut version of the Alice Schroeder video here.