The uncertainty-risk investment method
6/8/2025
In my last post, I talked about the uncertainty-risk matrix, and how the goal is to invest in businesses that are "high uncertainty, but low risk." But how does one assess uncertainty and risk?
To answer this question, we would rely on the two frameworks I've spoken of previously: the four investment risks and the four investor uncertainties. This provides us with a framework for assessing uncertainty and risk and determining whether the business we are looking at is high uncertainty and low risk.
Here's how it works:
- For any given investment idea, rate the level of uncertainty on a scale of 1 to 3 (1 being low, 2 being medium, and 3 being high) for each type of uncertainty (operational, growth, competitor, and macro).
- Add up the ratings for each uncertainty type. If it is between 4 and 6, then it is low uncertainty. If it is between 7 and 9, it is moderate uncertainty. And if it's from 10 to 12, it is high uncertainty.
- For the same idea, rate the level of risk on the same scale for each type of risk (depreciation, stagnation, unsatisfactory growth, and unsustainable growth).
- Add up the risk ratings using the same scale as #2.
- Depending on the results, follow the uncertainty-risk matrix.