Downside
Downside · Downside Risk · Potential Loss
The maximum probable loss on an investment — how far the stock price could fall.
What it is
Downside is the "bottom side" of an investment — the scenario when things go wrong. It is expressed as a percentage decline from the current price or as an absolute target price in a negative scenario.
In a three-scenario DCF, the downside is typically the output of the bear scenario — pessimistic projections of revenue, margins, and a higher WACC.
Risk/reward asymmetry: A good investment should have an asymmetric profile — limited downside and large potential upside. Example: downside −15%, upside +60%. Conversely, downside −60%, upside +20% is an unfavorable ratio.
Why track it
Monitoring downside protects against catastrophic losses. Value investing rule #1 (Buffett): "Never lose money." Rule #2: "Don't forget rule #1."
Asymmetric risk/reward is key: you are looking for situations where the downside is limited (strong business, solid balance sheet) and the upside is large (the market underestimates future growth or pricing power).
Real-world example
Microsoft (April 2026):
- →Current price: $382
- →Base DCF: $376 → downside −1.5%
- →Bear DCF: $168 → downside −56%
- →Bull DCF: $610 → upside +60%
Probability-weighted value (bull 25%, base 60%, bear 15%): $403 → modest upside with strong bear protection in the base scenario.