My calves felt like someone had covered them in gasoline and lit a match. I could almost feel my chest collapsing on my lungs. And I would have given my firstborn for a sugary drink.
I looked at my watch.
Still 13.1 miles to go.
I was a long way from the finish line of the 2016 Dublin City Marathon, but I was done.
I couldn’t understand what was happening.
For months before the big race, I’d run eighty-plus kilometres a week, all of them hard.
Tempo sessions. Intervals. Long runs. Recover runs. I ticked all the boxes.
I was confident I was fit enough to run the marathon in three hours, thirty minutes — some thirty minutes faster than my personal best.
Now my body was falling apart.
So I stopped running and began to walk.
A runner is never more despondent than when he or she has to walk.
I shook my head and tried running again, but I managed only another 500 metres before slowing down.
For the next two hours, I ran and walked to the finish line.
I looked up at the red timer hanging above me: 4 hours, 1 minute.
When they handed me a medal for finishing, I took it off in disgust.
A year or two beforehand this race time would have delighted me.
Since then, I’d invested countless hours in the track and on the roads to hit a target time for my third marathon…and I was half an hour late.
Runners hate to be late.
I didn’t know it then, but I’d trained too hard for my fitness levels and left nothing in the tank for race day.
I’d trained way beyond a margin of safety.
What is a Margin of Safety?
Benjamin Graham, one of Warren Buffet’s mentors
In 2016, I’d never heard of Benjamin Graham.
Graham was an American investor and economist. Born in the U.K. in 1894, he warned no investor can ever eliminate the risk of being wrong.
They can, however, insist on never overpaying no matter how exciting the investment. He called on investors to use a margin of safety.
It’s essential, the gap between the cost of an investment and its intrinsic or natural value.
Think of a margin of safety like a seat belt.
Ideally, you’ll never need to put it to the test, but having a margin of safety in place helps prevent potential misfortunes and even disasters. It also allows for imprecision and mitigates bad luck.
In my case, I should have reduced my weekly mileage and run a little slower in the weeks leading up to the Dublin City Marathon. That way, my legs would have felt fresh on race day.
How Warren Buffet Earned Millions With a Margin of Safety
Warren Buffet knows how to apply a margin of safety
Benjamin Graham passed away in 1976, but Warren Buffet cites him as a key influence.
In a remembrance for Graham, Buffet wrote,
“[Graham’s] counsel of soundness brought unfailing rewards to his followers — even to those with natural abilities inferior to more gifted practitioners who stumbled while following counsels of brilliance or fashion.”
Investors like Buffet worry about risk. They don’t want to lose all of their money on a single or risky investment. When evaluating a company or investment, Buffet always applies a margin of safety.
For example, in the spring of 2002 Buffet read the annual report of PetroChina. He determined the Chinese oil and gas company was worth $100 billion. The company was selling for $35 billion.
Buffet calculated a margin of safety of $65 billion, so he bought PetroChina for $488 million and sold it in 2007 for a $4 billion profit.
Managing Risk in the Real World
Of course, we’re not all Warren Buffets in the making, but successful professionals still apply a margin of safety to their work.
Rather than investing all of their money in a single stock or even a cryptocurrency, successful investors pick multiple stocks, funds and coins.
This way, if one coin or stock drops, investors are less likely to lose because their other investments are unaffected.
In other words, loss avoidance is the cornerstone of their investment philosophy.
Smart business managers knows how far they can allow sales to fall before breaking even. This potential fall represents their margin of safety.
Similarly, engineers design bridges to carry weight in excess of what’s permitted on the bridge itself. They also design tall buildings and skyscrapers that sway in wind streams and turbulence without collapsing.
The Eiffel Tower, for example, sways up to 13 centimetres in the wind to the alarm of many new visitors.
The Problems With Having No Margin of Safety
A greedy short-term investor would have put all of his or her money into Bitcoin this past December when it was worth nearly $20,000. However, he or she would have lost half of the investment by the end of January when Bitcoin plunged below $10,000.
In fact, several day traders from South Korea posted pictures online of their smashed laptops, monitors and even baths.
Instead, a more prudent investor would have invested only 5 to 10% of his or her assets into cryptocurrencies as a whole. Alternatively, he or she would spread their investments over several coins, like Ethereum.
This way, they’re less likely to feel like smashing up the bathroom because of Bitcoin’s dramatic price drop.
You might not be an aspiring Warren Buffet, but you can still apply this mental model to many real-life situations. The trick is to keep away from activities where you have little to gain and everything to lose.
How to Apply a Margin of Safety to Your Work
Long-distance runners typically put in anywhere from 50 to 150 miles a week while training for a marathon. This weekly mileage forms part of a three- or four-month training block, and it varies depending on how much punishment their bodies can take.
After a certain point, diminishing returns sets in for every athlete. These extra junk miles carry no psychological benefits. They also dramatically increase the athlete’s chance of injury.
So if you’re training for a marathon, finish each training session with something left in the tank. Thanks to this margin of safety, you’re less likely to feel exhausted and want to walk on race day.
(Never walk!)
You’ve little to gain by sweating out another ten or twenty miles a week. You are, however, far more likely to pull a hamstring or calf muscle and even miss the big race due to overtraining.
If you’re running a small online business, keep two or three month’s worth of cash reserves in your bank account. This way, if you face an unplanned expense or revenues fall, you’ll still be able to pay your bills.
If you invest all of your cash flow in Facebook ads, how will you pay for web hosting or your email service provider if those expensive advertising leads don’t convert?
Even if you don’t care about investing, cryptocurrencies or Facebook ads, you still can apply a margin of safety to other kinds of work.
If you’re a busy corporate executive, commit to your boss and team that you’ll deliver a key project by a certain date. Now you’ve little to gain by working on this project right up until the delivery date. Instead, push yourself to finish it early. This way, you have a margin of safety if something unforeseen happens.
A margin of safety is useful for creative work too.
For example, many freelance writers struggle to pay the bills because they rely on a single gig or client. If the editor doesn’t have a commission, the writer has to scramble for new work.
Plus if you get the flu or an editor cancels next month’s job, how will you keep your editor or your bank manager happy?
Instead, you could write for three or four publications or clients rather than relying on one. You could also cultivate a habit of outlining ideas for future articles in advance so you’re not overworked. These ready-to-go outlines and additional income sources represent your margin of safety.
Master Your Inner Game
It doesn’t matter if you’re an investor, business person, athlete or artist; you will always face factors outside of your control.
The market could rise or fall, your editor could cut his or her budget for freelancers, or it could rain heavily come race day.
Take heart from Benjamin Graham.
He wrote that,
“investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
Whether you’re an investor, athlete or artist, you can still control your inner game.
Train hard enough to achieve results but not so hard that you increase your risk of injury.
Keep a bank of ideas so you don’t have to worry about problems like feeling blocked. Develop more than one source of income.
And don’t bet the house on Bitcoin.
Calculate what’s at risk and the cost before investing time, energy or money in a project. Always pay less than you think something is worth. Be realistic about your expectations for the future rather than indulging in idle fantasies.
I didn’t achieve my target race time in 2016, but I learnt how to manage risk a little better, and that’s more valuable than any medal.