# Risks and disconfirmation

**FUND-11 · Fundamentals · Core**

**Lesson question:** What could make the business thesis wrong?

Original fictional examples; educational writing, not live market data, orders or production approval.

## By the end

- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.

**Prerequisites:** FUND-01

'The stock could fall' is an outcome, not a risk mechanism. Name what could weaken cash generation, financing or owner claims: competition, customer loss, execution, refinancing or excessive valuation.

Write disconfirming evidence before entry so the thesis cannot be endlessly rewritten afterward.

## Understand the mechanism

Business, financial, valuation and portfolio risks differ. A strong company can be too concentrated in one account. A low-frequency funding problem can matter more than frequent minor forecast errors.

Do not assign precise scenario probabilities without a basis. Severity and likelihood need separate treatment.

## Walk through the process

Translate a small set of adverse events into economic consequences. Identify leading indicators that would trigger review. Compare downside with capital and alternatives.

Diversifying tickers does not necessarily diversify shared customers, sectors or funding risks.

## Evidence and decision boundary

These are original fictional teaching figures, not a company screen. Actual analysis should use primary disclosures and distinguish management's explanation from your inference. Favorable or unfavorable evidence depends on the specific business, valuation and risk; no single ratio establishes a recommendation.

## A worked example

Harbor gets 30% of 1,000 revenue from one customer. Losing half that customer's purchases removes 150. If those sales contribute 40% before fixed costs, the profit contribution lost is 60 before mitigation.

This is a stress case, not a forecast. The graph varies the customer's lost share to show why concentration disclosures matter.

## Graph: Risks and disconfirmation—worked comparison

**Horizontal:** Fraction of concentrated customer's revenue lost  
**Vertical:** Lost contribution (USD millions)

Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.

Complete numerical data are embedded in `scripts/fundamentals/FUND-11.js` and displayed as an accessible table in the HTML lesson.

## What would invalidate the reading?

A long unquantified risk list can substitute for real analysis. Assuming different tickers eliminate common exposures hides concentration.

## Check your understanding

### What is contribution loss from 150 lost sales at a 40% contribution margin?

**Answer:** 60 million.

**Why:** Connect the risk event to business economics.

### What is the critical failure to avoid?

**Answer:** A long unquantified risk list can substitute for real analysis. Assuming different tickers eliminate common exposures hides concentration.

**Why:** Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome. **Critical risk check.**

## Takeaway

Return to the question: What could make the business thesis wrong? State the observed facts, the assumptions and the failure condition separately.

## References and provenance

The cited references support definitions and conventions. The teaching prose, tickets and numerical scenarios are original; they are not attributed as historical market observations.

- [SEC Financial Statements Guide](https://www.sec.gov/about/reports-publications/beginners-guide-financial-statements)