Margin of Safety - AI Analysis Prompt

Use this Warren Buffett rule prompt to apply “Insist on Margin of Safety” to a specific company. It turns a vague opinion into a repeatable checklist: what facts you must verify, which assumptions matter most, what would invalidate the thesis, and the common misreads that create false certainty. Expect a written output you can save: a thesis summary, key risks, and next-step questions for filings and earnings calls. If a claim matters, require primary-source citations before you act. Educational only — not investment advice.

Full Prompt

You are a valuation analyst specializing in Warren Buffett's "Margin of Safety" principle. Your task is to calculate the intrinsic value of {Company Name} and determine whether the current price offers an adequate margin of safety.
## Analysis Framework
### 1. Intrinsic Value Estimation — Method 1: DCF Analysis
- Project free cash flows for the next 10 years
- Use conservative growth assumptions (below analyst consensus)
- Terminal growth rate: no higher than long-term GDP growth
- Discount rate: use WACC or your required rate of return (minimum 10%)
- Sensitivity analysis: show intrinsic value at different growth/discount rate combos
### 2. Intrinsic Value Estimation — Method 2: Owner Earnings
- Calculate Buffett's "Owner Earnings" = Net Income + Depreciation - CapEx
- Apply a reasonable multiple based on growth rate and quality
- Compare owner earnings yield to 10-year Treasury yield
- Historical owner earnings trend over 10 years
- Normalize for any one-time items
### 3. Intrinsic Value Estimation — Method 3: Asset-Based / Liquidation
- Net asset value per share (Book value adjusted for fair market value)
- Net current asset value (Graham's NCAV approach)
- Real estate, IP, and brand value not captured on balance sheet
- Sum-of-the-parts valuation if applicable
- What would a private buyer pay for the entire business?
### 4. Margin of Safety Calculation
- Your best estimate of intrinsic value (average of methods above)
- Current market price vs. intrinsic value
- Margin of safety percentage = (Intrinsic Value - Price) / Intrinsic Value
- Is the margin of safety > 25%? (Buffett's typical minimum)
- How does this margin compare to other opportunities available?
### 5. Stress-Test the Margin
- What if revenue growth is 0% for 3 years?
- What if margins compress by 500 basis points?
- What if the multiple contracts to bear-market levels?
- At what price would there be NO margin of safety?
- What is the "no-brainer" buy price with 50% margin of safety?
### 6. Valuation Verdict
- Present the intrinsic value range (low / mid / high estimates)
- Current margin of safety assessment
- Clear recommendation: Strong Buy / Buy / Fair Value / Overvalued / Avoid
- Price targets: "Good" price, "Great" price, "Walk-away" price
- Key assumptions that could invalidate the valuation
## Output Format
Use specific numbers throughout. Present a valuation summary table. End with "The Buffett Margin" one-paragraph conclusion.

Related reading (close the loop)

Pick one path below to turn the output into a checkable, repeatable decision policy.

Educational only. Verify facts with primary sources and apply your own constraints.

Basic Questions

Why use three valuation methods? Isn't one enough?
Valuation is art, not science — each method has blind spots:

📊 DCF (Discounted Cash Flow):
- Strength: Theoretically most correct
- Blind spot: Extremely sensitive to growth rate assumptions

📊 Owner Earnings Method:
- Strength: Buffett's preferred method, focuses on real profits
- Blind spot: Not suitable for capital-intensive industries

📊 Asset-Based Method:
- Strength: Provides "worst case" floor
- Blind spot: Ignores earning power

Cross-validating three methods to get a "value range" is more reliable than a single number.

Usage Tips

How to make AI valuation more accurate?
✅ Key: Provide real financial data

AI valuation quality entirely depends on input data quality. Recommendations:

1. Extract 5-10 years of key data from annual reports and append to the prompt:
- Revenue, net income, free cash flow
- ROE, ROIC
- CapEx, depreciation
- Share count (check for dilution)

2. Explicitly tell AI your reasonable assumption ranges:
- "Assume revenue growth of 8-12% for the next 5 years"
- "Use 10% discount rate"

3. Ask AI to show sensitivity analysis table, not a single number

Getting started

Does this prompt give investment advice or buy/sell calls?
No. It is a research helper that turns your thinking into checkable inputs and constraints: what evidence you must verify, what would prove the thesis wrong, and what common misreads to avoid. Treat the output as a draft, not a signal. Validate every material number against primary sources (filings, earnings releases, investor presentations, transcripts), and do not act unless you can write down (1) position-size limits and (2) explicit invalidation triggers.
What inputs should I provide for a reliable result?
At minimum: a 1-sentence business model summary, your current thesis (why it wins/loses), time horizon, and risk constraints; a valuation/price range; and the latest financial statements (profit quality, cash flow, debt/liquidity). Add context that reduces hallucinations: the exact filing period, known one-offs, key competitors, and what you do NOT know yet. If an input is missing, label it as missing evidence instead of letting the model guess.

Validation and boundaries

How do I validate the output?
Validate falsifiable claims one by one. Rewrite each key statement into something you can check: the metric, the period, and the source. Numbers must match filings; management claims must be traceable to transcripts/guidance; and “moat” claims need observable evidence (pricing power, retention, switching costs, cost structure). Anything you cannot verify becomes a follow-up task, not a decision trigger. If the model cites dates, confirm they are not beyond its knowledge cutoff.
When should I NOT act on the output?
If you cannot write down invalidation triggers, a position-size cap, or primary-source evidence for the key claims behind “Insist on Margin of Safety”, do not act. The safer move is usually to reduce size, slow down, and schedule the next review.

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