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training_data/curated/text/0b8f121fe30c1909b45bd6867830de88047f5d2ff18f947bf3e07d8af457472e.txt

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+198  •   The Intelligent Option Investor
+time to take a larger position and to use more leverage is when the market is 
+pricing a stock as if it were almost certain that a company will face a worst-case 
+future when you consider this worst-case scenario to be relatively unlikely. In 
+this illustration, if the stock price were to fall by 50 percent—to the $8 per share 
+level—while my assessment of the value of the company remained unchanged 
+(worst, likely, and best case of $6, $25, and $37, respectively), I would think I 
+had the margin of safety necessary to commit a larger proportion of my portfo-
+lio to the investment and add more investment leverage. With the stock sitting 
+at $8 per share, my risk ($8 − $6 = $2) is low and unlikely to be realized while 
+my potential return is large and much closer to being assured. With the stock’s 
+present price of $16 per share, my risk ($16 − $6 = $10) is large and when bad-
+case scenarios are factored in along with the worst-case scenario, more likely 
+to occur.
+Thinking of margins of safety from this perspective, it is obvious that 
+one should not frame them in terms of arbitrary levels (e.g., “I have a rule 
+to only buy stocks that are 30% or lower than my fair value estimate. ”), but 
+rather in terms informed by an intelligent valuation range. In this example, 
+a 36 percent margin of safety is sufficient for me to commit a small 
+proportion of my portfolio to an unlevered investment, but not to go “all 
+in. ” For a concentrated, levered position in this investment, I would need a 
+margin of safety approaching 76 percent (= ($25 − $6)/$25) and at least over  
+60 percent (= ($25 - $10)/$25).
+When might such a large margin of safety present itself? Just when 
+the market has lost all hope and is pricing in disaster for the company. 
+This is where the contrarianism comes into play. The best time to make 
+a levered investment in a company with high levels of operational lever -
+age is when the rest of the market is mainly concerned about the possible 
+negative effects of that operational leverage. For example, during a reces-
+sion, consumer demand drops and idle time at factories increases. This 
+has a quick and often very negative effect on profitability for companies 
+that own the idle factories, and if conditions are bad enough or look to 
+have no near-term (i.e., within about six months) resolution, the price of 
+those companies’ stocks can plummet. Market prices often fall so low as to 
+imply, from a valuation perspective, that the factories are likely to remain 
+idled forever. In these cases, I believe that not using investment leverage in 
+this case may carry with it more real risk than using  investment leverage