May 13, 2017
In late August of 2005, one of the most dangerous tropical storms in history began brewing.
The waters of the Gulf of Mexico were unusually warm that month, and the high temperatures transformed the ocean basin into a giant cauldron with the optimal conditions for growth.
As the tropical storm cut across the tip of Florida and entered the Gulf, it immediately began to swell.
In less than 24 hours, the storm doubled in size. And as it grew into a full-blown hurricane, the weather experts gave it a name: Hurricane Katrina.
Katrina churned through the tropical waters of the Gulf and quickly escalated to peak intensity. It ripped through the atmosphere with remarkable force, registering gusts of wind that exceeded 175 mph (280 km/h) and lasted for more than a minute. By the time the storm hit the southeastern coast of Louisiana on August 29th, Hurricane Katrina was nearly 120 miles wide.
A storm of Katrina’s size is expected to cause flooding and damage, but coastal cities and neighborhoods use a variety of flood walls and levees to prevent total catastrophe. These walls are built along rivers and waterways and act as a barrier to hold back usually high waters and prevent flooding.
Shortly after Hurricane Katrina made landfall, it became clear that the levees of New Orleans might not be able to hold back the rising waters. A few hours in, the director of the National Hurricane Center said, “I do not think anyone can tell you with confidence right now whether the levees will be topped or not, but that's obviously a very, very great concern.”
Minutes later, the levees began to fail. The waters breached the levees and flood walls of New Orleans in more than 50 different places. Entire districts became submerged in more than 10 feet of water. Evacuation routes were destroyed as bridges and roads collapsed. At Memorial Medical Center in the heart of New Orleans, the surging water killed the backup generators.
Without power, temperatures inside the hospital rose to over 100 degrees as doctors and nurses took turns manually pumping each breath into dying patients in a desperate attempt to keep people alive.
Water flooded more than 80 percent of the city. And in the days that followed, the death toll began to rise. Bodies were found floating down the streets. Rescue and recovery efforts failed to track down missing people. At least 1,200 people died, and hundreds more were unaccounted for—the total number of dead is still unknown to this day.
So many residents were displaced by Hurricane Katrina that the population of New Orleans dropped by 50 percent from 484,000 before the storm to 230,000 one year later. In total, the damages from Hurricane Katrina surpassed $100 billion. It was the costliest natural disaster in the history of the United States.
The margin of safety
The great mistake of Hurricane Katrina was that the levees and flood walls were not built with a proper “margin of safety.” The engineers miscalculated the strength of the soil the walls were built upon. As a result, the walls buckled and the surging waters poured over the top, eroding the soft soil and magnifying the problem. Within a few minutes, the entire system collapsed.
This term, margin of safety, is an engineering concept used to describe the ability of a system to withstand loads that are greater than expected.
Imagine you are building a bridge.
The maximum weight for a fully loaded commercial truck is around 80,000 pounds (36,000 kg), but any decent engineer will build a bridge that can safely carry vehicles weighing far more. You don't want to drive an 80,000-pound truck across a bridge that can only hold 80,001 pounds. Just to be safe, the engineer might build the bridge to handle 5x the expected weight, say 400,000 pounds. This additional capacity is known as the margin of safety.
Of course, maintaining a proper margin of safety is crucial not only in construction and engineering, but also in many areas of daily life.
How to use a margin of safety in real life
There are many ways to implement a margin of safety in everyday life. The core idea is to protect yourself from unforeseen problems and challenges by building a buffer between what you expect to happen and what could happen. This idea is widely useful on a day-to-day basis because uncertainty creeps into every area of life. Let's explore a few ways we can use this concept to live better.
One of the keys to being prompt and reliable is to use a margin of safety when scheduling your day. If it takes 10 minutes to get somewhere, don't wait to leave until 11 minutes beforehand. Instead, leave 30 minutes beforehand. Similarly, if it always seems to take an extra five minutes to wind down a meeting, then don't schedule meetings back-to-back.
If you're always running late it is because you are living your life without a margin of safety. There will always delays in the real world. When everything has to go perfectly for you to be on time, you're not going to be on time very often. Give yourself a healthy margin of safety.
When strength training, you can utilize a margin of safety by finishing each set with at least one repetition left in the tank. This strategy ensures you can complete each repetition with proper technique and reduces the odds of injury. Training to failure eliminates your margin of safety.
Similarly, strength coaches often prevent their athletes from attempting to lift as much weight as possible for a single repetition. Instead, they only allow their athletes to select a weight they can do for at least three repetitions. (Elite sports teams often test a three-rep max, not a one-rep max.) This strategy creates a margin of safety and helps prevent injury during training by never placing athletes under a maximal load.
Warren Buffett, the famous investor, is a proponent of using a margin of safety when considering which stock to buy. He says, “Do not cut it close. That is what Ben Graham meant by having a margin of safety. You don’t try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin.”
Our predictions and calculations turn out to be wrong all the time. When it comes to assessing investment opportunities, you want a margin of safety that is so wide, it doesn't matter if your prediction is inaccurate.
Buffett's business partner, Charlie Munger has said something similar, “The margin of safety ought to be so attractive. The decision should be obvious.”
As Munger says, “If you could take the stock price and multiply it by the number of shares and get something that was one third or less of sellout value… you've got a lot of edge going for you. Even with an elderly alcoholic running a stodgy business, this significant excess of real value per share working for you means that all kinds of good things can happen to you. You had a huge margin of safety by having this big excess value going for you.”
Many complex projects require coordination between multiple people. Let's say five people need to touch a project before it is completed. On average, it might take each person four days to complete their task. Under these circumstances, it would seem reasonable to set the deadline for 20 days from now, which gives each person four days.
But let's say that the total range of time each stage could take is between two days and six days. It is often better to plan for the worst case scenario and set the deadline 30 days from now, which gives each person six days. Hopefully, the average of four days per person will continue and you'll finish the project early. But in any major project, it helps to have a cushion to safeguard against any unexpected problems.
If you have to spend every dollar you earn each month, then you don't have any margin of safety to protect against unexpected expenses. Conversely, if you can manage to live on 90 percent of your income, then the 10 percent you save provides a nice buffer in case of emergency.
And if you can manage to live on 50 percent of your income, then you can handle a great amount of financial stress. Imagine a medical emergency that requires $25,000 in cash. With a large buffer of cash, you can withstand such an unpleasant surprise. A big bank account can handle a lot of turbulence with inflows and outflows. Meanwhile, one small bank account can be sent into bankruptcy from one big shock. The bigger the buffer, the more chaos you can handle.
Jay Leno, the famous comedian, is a perfect example of this strategy. Leno worked two jobs at the beginning of his career, but lived off the income from one of them.
“When I was younger, I would always save the money I made working at the car dealership and I would spend the money I made as a comedian,” he says. “When I started to get a bit famous, the money I was making as a comedian was way more than the money I was making at the car dealership, so I would bank that and spend the car dealership money.”
Leno continued this habit even after he was making millions of dollars per year hosting The Tonight Show. “When I got ‘The Tonight Show,' I always made sure I did 150 [comedy show] gigs a year so I never had to touch the principal,” Leno says. “I've never touched a dime of my ‘Tonight Show' money. Ever.”
There are millions of squirrels in the world today. If a viral outbreak killed 100,000 squirrels, the species would continue just fine. But if a similar virus killed 100,000 lions, the species would be extinct. There is not enough slack in the ecosystem to handle such a catastrophe. Endangered species are in a precarious position because they have no margin of safety.
Mobility and stretching
Each muscle in the body has a “stress-strain curve” which describes how far a muscle can stretch before reaching the point of failure. Injury often occurs near the extreme end of this curve. The closer you get to the limits of your range of motion, the more strain your muscles endure.
Practicing stretching and mobility exercises can help expand your range of motion and widen your stress-strain curve. This helps to keep your normal movements in the middle of the curve and away from the extremes where injury is more likely to occur. In other words, it is not necessary to be as flexible as a yoga teacher, but it's nice to have a good margin of safety in your mobility to prevent injury.
Summary of margin of safety
Utilizing a margin of safety can serve you well in nearly any area of life.
All information—no matter how bulletproof it may seem—comes with some degree of error. A margin of safety acts as a buffer against the unknown, the random, and the unseen. Perhaps the greatest benefit is that a margin of safety reduces stress and overwhelm. Nobody can predict the future, but there is a sense of quiet confidence that comes over you when you know you are capable of handling the uncertainties of life.
If your life is designed only to handle the expected challenges, then it will fall apart as soon as something unexpected happens to you. Always be stronger than you need to be. Always leave room for the unexpected.
Subscribe to Business Insider's Financial Insights Newsletter