The Seeking Wisdom blog on WordPress had a great post about the concept of margin of safety. Read it here.
Among other points, he provides an excerpt of a 1984 speech on buying companies, by none other than Warren Buffett (boldface is Vembunarayanan’s).
You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing.
He has a more recent post on supply and demand that’s worth a read also.