The Hidden Risk of Going Long

One of the most common arguments about the difference between long and short positions is that shorts have theoretically unlimited loss potential, while an unleveraged long position can lose a maximum of 100%.

And technically, that is absolutely correct.

If I invest $1,000 in an asset without leverage, the most I can lose on that particular investment is $1,000. The asset can go to zero, but it cannot go below zero in a way that makes me lose more than the capital I invested.

But there is another side to this idea that I think is often overlooked—particularly when people talk about strategies such as "buying the dip," averaging down, or buying an asset simply because its price has already fallen substantially.

The important point is this:

An asset having already fallen 90% does not mean that most of the percentage downside has disappeared.

For a new buyer, the downside can still be essentially 100%.

An Asset Can Fall 90% Again and Again

Imagine an asset trades at $10 and subsequently falls to $1.

That is a 90% decline.

At this point, it can be tempting to think that the asset has already experienced most of its possible decline. After all, it has fallen from $10 all the way to $1.

But now consider what happens to someone who buys at $1.

The price can fall from:

$1 to $0.10

That is another 90% loss.

Someone could then look at $0.10 and think, "Surely now it is incredibly cheap."

But the price can fall from:

$0.10 to $0.01

That's another 90%.

And then:

$0.01 to $0.001

Another 90%.

Mathematically, this sequence can continue indefinitely while the price approaches zero.

$10 → $1 → $0.10 → $0.01 → $0.001 → $0.0001...

At every step, the price has fallen dramatically from where it previously traded. And yet a new buyer can still lose another 90%.

A Low Price Doesn't Mean Low Percentage Downside

This is the distinction I think matters.

When we say that an unleveraged long position has a maximum loss of 100%, we are talking about one particular allocation of capital.

If I buy $1,000 worth of an asset, I cannot lose more than that $1,000 on that position.

But that doesn't mean that an asset which has already lost 90%, 95%, or even 99% of its value has little downside remaining for someone buying it today.

Suppose an asset falls from $100 to $1.

It has fallen 99%.

A new investor buying at $1 can still experience another 99% decline:

$1 → $0.01

And someone buying at $0.01 could subsequently experience another 99% decline:

$0.01 → $0.0001

The previous percentage decline doesn't protect the next buyer.

The Problem With "It Has Already Fallen So Much"

This is where the concept becomes particularly relevant to "buy the dip" strategies.

There is an enormous difference between saying:

"This asset is cheaper than it used to be."

and saying:

"This asset is undervalued at its current price."

Those are not the same statement.

An asset falling from $100 to $20 tells us something about its historical price movement. It does not, by itself, tell us what the asset should be worth.

Perhaps $20 is extraordinarily cheap.

Perhaps $20 is approximately fair value.

Or perhaps the asset is ultimately worth zero.

If the third scenario is true, the fact that the asset previously traded at $100 provides very little protection to someone buying at $20.

Buying Lower Doesn't Automatically Mean Taking Less Risk

There can therefore be a psychological trap in looking at absolute prices.

Imagine watching an asset move like this:

$100 → $50 → $20 → $10 → $5 → $1.

At each stage, the price looks cheaper relative to its previous price.

Someone could repeatedly conclude:

"It's fallen enough."

"It's incredibly cheap now."

"Surely it can't fall much further."

But percentage returns reset from the investor's entry price.

If I buy at $10 and it falls to $1, I lose 90%.

If you then buy at $1 and it falls to $0.10, you also lose 90%.

The fact that you bought the asset 90% below my original purchase price doesn't prevent you from suffering exactly the same percentage loss that I did.

Averaging Down Doesn't Eliminate This Problem

The same principle matters when averaging down.

Suppose I buy an asset at $10.

It falls to $5, so I buy more.

It falls to $2, so I buy more.

It falls to $1, so I buy more.

It falls to $0.50, so I buy more again.

My average purchase price is certainly declining.

But something else is happening at the same time:

I am continually putting fresh capital at risk.

A lower average entry price is useful if the asset eventually recovers. But averaging down does not itself cause that recovery.

If my underlying thesis is wrong and the asset continues deteriorating toward zero, repeatedly buying at lower prices can simply mean repeatedly allocating additional capital to the same losing thesis.

Every Positive Price Still Has Zero Beneath It

This is perhaps the simplest way to think about the whole concept.

As long as an asset trades above zero, zero remains below it.

It doesn't matter whether the asset trades at:

$100

$10

$1

$0.10

or $0.0001.

A buyer entering at any of those positive prices can still lose essentially 100% of the capital invested if the asset ultimately becomes worthless.

That doesn't mean the probability of going to zero is the same at every price. Obviously, the probability depends on the asset, its fundamentals, market conditions, and many other factors.

The point is simply that the historical decline itself does not mathematically eliminate the percentage downside available to a new buyer.

Large Losses Also Require Disproportionately Large Recoveries

There is another reason this matters.

Percentage losses and percentage gains are asymmetric.

If an asset falls 50%, it needs to rise 100% to return to its starting point.

If it falls 75%, it needs to rise 300%.

And if it falls 90%, it needs to rise 900%.

For example:

$10 → $1 = −90%

But:

$1 → $10 = +900%

So an investor buying after a huge decline shouldn't merely ask whether the asset can recover.

The relevant question is whether there is a sufficiently strong reason to believe that its future value is materially higher than the current price.

Price and Value Are Not the Same Thing

Ultimately, this is why I think "buy the dip" needs more qualification than it sometimes receives.

A falling price can create an opportunity when the underlying value of the asset has not deteriorated proportionally.

But a falling price can also be the market responding to a genuine deterioration in value.

In the first situation, buying lower may be attractive.

In the second, continually buying because "it can't possibly go much lower" can be extremely destructive.

The fact that something once traded at $100 doesn't mean $10 is cheap.

And the fact that it has already fallen 90% doesn't mean another 90% decline is impossible.

The Real Meaning of the 100% Maximum Loss

So, yes: an unleveraged long position has a clearly defined maximum loss.

You can lose 100% of the capital allocated to that position, but no more.

That statement is mathematically correct.

But it should not be confused with a very different statement:

"Because an asset has already suffered a huge decline, there isn't much downside left."

That statement is not mathematically correct.

An asset can fall 90%, and then fall another 90%, and then another 90%.

Each individual buyer can still experience an enormous percentage loss from their own entry price.

Perhaps the most useful way to summarize the idea is this:

A long position has a maximum loss of 100%, but proximity to that maximum cannot be inferred from how far the asset has already fallen. At every positive price, a new long position still has essentially 100% downside to zero.

That distinction becomes especially important whenever the investment thesis starts to become simply:

"It has already fallen so much that it must be cheap."

Sometimes an asset that has fallen substantially really is an opportunity.

And sometimes it is simply on its way to zero.

The historical price alone cannot tell us which one it is.