Scenario Analysis & Sensitivities

Introduction

Valuation depends on assumptions. Scenario and sensitivity analysis stress-tests those assumptions so you understand the range of outcomes — and whether a stock still makes sense if you're wrong.

Scenarios

Build a few futures:

• Base case — your most likely path
• Bull case — if growth surprises to the upside
• Bear case — if assumptions disappoint

Sensitivity Tables

Change one assumption at a time to see its impact:

            | growth 5% | growth 8% | growth 11%
margin 12%  |  value A  |  value B  |  value C
margin 15%  |  value D  |  value E  |  value F

This shows how sensitive the valuation is to each input.

Downside First

Ask the most important question:what happens to my downside if the bear case hits?

If the bear case still leaves a reasonable valuation or acceptable loss, the risk is manageable. If the bear case means disaster, size accordingly.

Asymmetric Opportunities

The best setups are asymmetric:

• Limited downside (protected by value and margin of safety)
• Meaningful upside (if the bull case happens)

Using It in a Decision

• Prefer stocks that make sense in the base and can absorb the bear case
• Avoid stocks that only 'work' if everything goes perfectly
• Let scenarios set your position size and stop plan

Summary

• Scenarios: base, bull and bear cases
• Sensitivity tables show which assumptions matter most
• Check your downside if the bear case happens
• Favor asymmetric, limited-downside setups
• Scenarios drive position sizing and stops

Next Lesson

The discipline of buying cheap: margin of safety.