Valuation & Margin of Safety

Valuation intimidates people because it looks like mathematics. It is actually just a disciplined form of a plain question: how much cash can this business hand its owners over its remaining life, and what is that stream worth today? Arche defines intrinsic value as the present value of that owner cash. Everything else is technique.

Why conservative beats clever

The inputs — future growth, future returns, the discount rate — are estimates. Two honest analysts can differ materially on the same company. The response to imprecision is not more decimal places; it is a margin of safety: require enough room below a conservative estimate that a reasonable error does not erase the case.

How this site does it — in the open

Every valuation figure here comes from the same disclosed recipe:

• Base: three-year average owner earnings (not EBITDA, not adjusted anything).
• Growth: the company’s own historical owner-earnings growth, haircut by 25% and capped at 10% — the record, discounted for humility.
• Horizon: ten years, then a terminal value at 2.5% growth — roughly GDP; no business outgrows the economy forever.
• Discount rate: a flat 10% hurdle. Not today’s bond yield, not a CAPM output — a demanding, stable standard that makes results comparable across companies and eras.

Banks and insurers get an excess-return model on book value instead (leverage makes owner-earnings DCFs meaningless there); REITs use funds from operations. Where owner earnings are negative or unknowable, we say “not meaningful” rather than publish nonsense.

The reverse DCF: the most honest number on the page

Rather than argue our estimate is right, each company page also runs the machine backwards: what growth rate would justify today’s price under the same conservative assumptions? If a company delivered 10% annual owner-earnings growth for a decade and its price implies 21%, no one needs to shout — the gap is the analysis. Sometimes the implied number is modest, and that’s worth knowing too.

This is why the site reports valuation as bands — Discounted, Fair, Full, Demanding — and keeps them separate from the Arche Quality Grade. A single blended score would rank companies by attractiveness, which drifts from education toward advice. Arche’s two separate readings preserve the discipline: identify business quality first, then evaluate price on its own terms.

What margins of safety are not

They are not predictions, price targets, or timing signals. A stock can sit above any conservative estimate for years and compound anyway; estimates can be wrong; hurdle rates are choices. The margin of safety is a personal policy about error, not a property of the stock. These pages give you the conservative arithmetic and every assumption behind it — the judgment about what gap is enough, for what business, inside whose circle of competence, stays where it belongs: with you.