The first type is what I call operational uncertainty. This is uncertainty around the capacity of management to effectively and responsibly utilize resources in order to deliver on its promises and increase shareholder value. Does management understand and communicate its value proposition? Is it a responsible and rational steward of its resources? Is it focused on the right things?
The second type of uncertainty is growth uncertainty. This is uncertainty around the ability of the company to anticipate and capture customer demand for its offerings. Will the company be able to expand its market share or take advantage of new opportunities?
The third type is competitor uncertainty. This is centered around the company's ability to protect its profits from rivals and the unpredictable evolution of the competitive landscape. Is there a new competitor that will threaten the company's position? Are there innovations that may open up the market to new competitors?
The last type of investor uncertainty is macro uncertainty. This is centered on the ability of the company to adapt to or withstand factors that are largely outside its direct control, stemming from the broader external environment. Can such and such law or policy affect the company's future? Will issues in such and such region affect the company's supply chain?
As a rule, uncertainty tends to drive the price of an investment down - investors prefer certain returns vs. uncertain ones. However, it's important to understand that an increase in uncertainty does not mean an increase in risk. Uncertainty only becomes a problem if one is vulnerable to a potential outcome.
For instance, I may be uncertain whether it's going to rain while I'm walking outside. But being outside only becomes risky if I am not prepared - i.e. if I don't have rainboots and an umbrella. If I do, then there is no real risk.
Likewise, a company can face potential competition. But if it has a strong competitive advantage and market positioning, then it is not necessarily at risk.
This is why it's important to understand uncertainty at a more nuanced level and compare it to the potential risks involved. Ultimately the best investment is one where there is high uncertainty, but low risk. High uncertainty will likely bring the price down; low risk will likely protect the investment from loss.