Legendary investor Mohnish Pabrai has a simple framework for investing decisions: invest in businesses that are high uncertainty, but low risk. That is, the business' future may be in doubt, but there should be no danger to the investor.
Applying this framework, we can create a simple matrix to guide us:
| Low Uncertainty | High Uncertainty | |
|---|---|---|
| Low Risk | Predictable and safe. It is likely appropriately priced. If you understand the business, put it on your watchlist. Wait for something to happen that can introduce uncertainty around the company's future. | Some variability, but minimal consequences. Likely buy opportunity. If you understand the business, consider buying. |
| High Risk | Danger zone. If you are inexperienced, stay far away. If you have money to spare and you have a strong understanding not only of the business, but the industry and its future, investigate deeper. | Volatile, unpredictable, and potentially disastrous. Avoid! |
As you see, investing using this framework depends on two things: your ability to assess risk and uncertainty (and not confuse the two concepts), and the strength of your understanding of the business and its greater context.