# 🛡️ Margin of Safety Tool Documentation
## Overview
The Margin of Safety tool calculates the difference between a stock's current market price and its intrinsic value, helping value investors make informed decisions based on Benjamin Graham's principle of buying with a safety cushion.
## What is Margin of Safety?
Margin of Safety = (Intrinsic Value - Current Price) / Intrinsic Value × 100%
A positive margin of safety means the stock is trading below its intrinsic value (undervalued), while a negative margin indicates overvaluation.
## Tool Details
### Tool Name
`calculate_margin_of_safety`
### Description
Calculate Margin of Safety for value investing decisions with risk adjustment and detailed analysis.
### Parameters
| Parameter | Type | Required | Default | Description |
|-----------|------|----------|---------|-------------|
| `symbol` | string | Yes | - | Stock symbol (e.g., AAPL, SCB) |
| `currentPrice` | number | Yes | - | Current stock price |
| `intrinsicValue` | number | Yes | - | Calculated intrinsic value of the stock |
| `valuationMethod` | string | No | Multiple Methods Average | Method used to calculate intrinsic value |
| `riskAdjustment` | number | No | 1.0 | Risk adjustment factor (0.8 for high risk, 1.0 for normal, 1.2 for low risk) |
### Valuation Method Options
- `DCF` - Discounted Cash Flow
- `DDM` - Dividend Discount Model
- `PE Band` - PE Band Analysis
- `Asset-Based` - Asset-Based Valuation
- `Multiple Methods Average` - Average of multiple methods
### Risk Adjustment Factor
- `0.5` - Very high risk (conservative)
- `0.8` - High risk
- `1.0` - Normal risk (neutral)
- `1.2` - Low risk (optimistic)
- `1.5` - Very low risk (aggressive)
## Response Format
```json
{
"symbol": "SCB",
"currentPrice": 145.5,
"intrinsicValue": 180,
"marginOfSafety": 34.5,
"marginOfSafetyPercentage": 19.17,
"valuationMethod": "Multiple Methods Average",
"recommendation": "Hold",
"analysis": "Moderate margin of safety of 19.2%. Stock is reasonably valued but may not provide sufficient margin for error...",
"riskLevel": "Medium",
"principlesCheck": {
"belowIntrinsicValue": true,
"adequateMargin": false,
"reasonableRisk": true
},
"unadjustedMarginOfSafety": 19.17,
"riskAdjustmentFactor": 1
}
```
## Recommendation Scale
| Margin of Safety | Recommendation | Risk Level | Interpretation |
|------------------|----------------|------------|----------------|
| ≥ 50% | Strong Buy | Very Low | Excellent margin with substantial downside protection |
| 30% - 49% | Buy | Low | Good margin with reasonable downside protection |
| 10% - 29% | Hold | Medium | Moderate margin, may not provide sufficient cushion |
| -10% - 9% | Sell | High | Negative margin, limited upside potential |
| < -10% | Strong Sell | Very High | Significantly overvalued with high risk of loss |
## Usage Examples
### Example 1: Conservative Value Investing
```json
{
"tool": "calculate_margin_of_safety",
"arguments": {
"symbol": "SCB",
"currentPrice": 145.50,
"intrinsicValue": 200.00,
"valuationMethod": "DCF",
"riskAdjustment": 0.8
}
}
```
**Result**: Strong Buy recommendation with 33.3% margin even after conservative risk adjustment.
### Example 2: Growth Stock Analysis
```json
{
"tool": "calculate_margin_of_safety",
"arguments": {
"symbol": "PTT",
"currentPrice": 35.00,
"intrinsicValue": 32.00,
"valuationMethod": "Multiple Methods Average",
"riskAdjustment": 1.2
}
}
```
**Result**: Sell recommendation with negative margin even after optimistic adjustment.
## Integration in Workflows
### Complete Valuation Workflow
The Margin of Safety tool is automatically included in the `complete_valuation` tool, which:
1. Fetches stock data
2. Runs PE Band, DDM, and DCF valuations
3. Calculates average intrinsic value
4. Applies margin of safety analysis
5. Provides consolidated recommendation
### Custom Valuation Workflow
```
1. Run individual valuation tools (DCF, DDM, PE Band)
2. Average the intrinsic values
3. Use calculate_margin_of_safety with the average
4. Apply risk adjustment based on company profile
5. Make investment decision
```
## Value Investing Principles Check
The tool includes a `principlesCheck` object that validates:
- **belowIntrinsicValue**: Is the price below intrinsic value?
- **adequateMargin**: Is the margin ≥ 20% (Ben Graham's rule)?
- **reasonableRisk**: Is the risk level acceptable?
## Best Practices
1. **Always use risk adjustment** for:
- High-growth stocks (use 0.8)
- Cyclical companies (use 0.8)
- Stable blue-chips (use 1.2)
2. **Combine multiple valuation methods** for more accurate intrinsic value
3. **Consider qualitative factors** not captured in the calculations
4. **Update intrinsic value regularly** as new information becomes available
## Testing with curl
```bash
curl -X POST http://localhost:2901/mcp \
-H "Content-Type: application/json" \
-d '{
"jsonrpc": "2.0",
"id": 1,
"method": "tools/call",
"params": {
"name": "calculate_margin_of_safety",
"arguments": {
"symbol": "ADVANC",
"currentPrice": 185.50,
"intrinsicValue": 220.00,
"valuationMethod": "Multiple Methods Average",
"riskAdjustment": 1.0
}
}
}'
```
## n8n Integration
In n8n, use the MCP Client node:
1. **Tool**: `calculate_margin_of_safety`
2. **Parameters**: Fill in the required fields
3. **Dynamic Values**: Use n8n expressions for dynamic input:
- `{{ $json.currentPrice }}`
- `{{ $json.intrinsicValue }}`
## Common Use Cases
1. **Portfolio Screening**: Filter stocks with >30% margin of safety
2. **Buy/Sell Decisions**: Identify entry/exit points
3. **Risk Management**: Assess potential downside
4. **Performance Tracking**: Monitor margin changes over time
## Limitations
1. Relies on accurate intrinsic value calculation
2. Doesn't account for market sentiment
3. May not work well for:
- Startups with no earnings
- Highly speculative stocks
- Companies in distress
## Related Tools
- `calculate_dcf` - For intrinsic value calculation
- `calculate_ddm` - For dividend-paying stocks
- `calculate_pe_band` - For relative valuation
- `complete_valuation` - For automated analysis
