Margin of Safety - AI Analysis Prompt

Calculate intrinsic value using multiple methods and determine if the current price offers an adequate margin of safety, Buffett-style.

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 β€” 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 β€” 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 β€” 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.

Basic Questions

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

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

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

πŸ“Š 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?
βœ… 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

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