How big should the margin of safety be?

Big enough to cover errors in your assumptions; Graham often sought one-third off estimated value for assets and demanded higher for unstable earnings.

Does margin of safety change for earnings vs. assets?

Yes. Asset plays can use balance-sheet haircuts; earnings plays need bigger discounts or very stable records.

Do catalysts shrink the required margin?

Only if they are concrete and near-term; otherwise keep the full buffer.

Margin of Safety - Graham's Core Rule

Graham's definition

"To have a true investment, there must be present a true margin of safety." - Security Analysis, Margin of Safety chapter
"The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future." - Security Analysis, Margin of Safety chapter

The buffer between price and conservative value absorbs mistakes, delays, and bad luck.

Building haircuts (assets)

Cash: 100% if unrestricted and in strong banks.
Receivables: 70-90% depending on aging and customer concentration.
Inventory: 0-50% depending on obsolescence; raw materials > finished goods.
Fixed assets: Often excluded for net-nets; include only if salable and verified.
Off-balance sheet: Subtract lease/guarantee obligations; add hidden assets only if documented.

Building haircuts (earnings)

Normalize across a full cycle; exclude one-time gains.
Demand long records: Graham looked for 7-10 years of earnings and dividends for quality.
Apply a multiple only after haircuts to earnings and with a safety discount to the resulting value.

How much safety?

Asset plays: Price at least one-third below conservatively adjusted net current asset value.
Earnings plays: Demand low multiples on normalized earnings, plus balance-sheet strength.
Situations: Liquidations or tenders can use smaller gaps if terms and timing are firm.

Position sizing with margin of safety

Larger safety = room for larger size; thinner safety = smaller size.
Concentration grows risk of correlated errors; diversify across at least 10-15 names for enterprising investors.

Quick checklist

Have I applied explicit haircuts to cash, receivables, and inventory?
Is there a factual reason the assets or earnings are worth my estimate?
Is price at least one-third below conservative value (more if quality is low)?
What error or delay can erase this buffer?
How many positions share the same risks?

Takeaways

Margin of safety is a pricing rule, not a slogan.
Haircut first, value second, price last.
Let the size of the buffer set your position size and your patience window.