The Difference Between Uncertainty and Risk
Today is a big down day in the market, which is never fun, but it does present an opportunity to reflect on the difference between uncertainty and risk.

Risk is when you have a set of bounded outcomes. Meaning, the amount of possible outcomes is restricted to a finite interval, allowing you to research and consider each one.

Uncertainty is when outcomes are unbounded. This is way scarier because it is the realm of "unknown unknowns." There are always uncertainties in the stock market because almost anything can happen.

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When you invest, the more you can move in the direction of known-risks instead of unknown-unknowns, the better.

A down day in the market is a known-risk.

When you invest it is a good exercise to write out a memo along the lines of: "Here are the big risks I see with this company:" xyz
"Here are the ones I'm comfortable with:" abc
"Here are the ones that would materially change the thesis:" qfg

For me, a down day in the market is a risk I am comfortable taking, because it is unavoidable, and it is also what we investors get paid extra for over the "risk free rate."

Writing a pre-mortem memo like this makes it easier to act rationally when negative, but known-risks occur. When you feel terrible, it helps to steady yourself by reading your own words that say something akin to:

"If I am wrong, here are the 5 reasons why I am likely to be wrong"

and

"a 10% drop in this company due to a one-day market sell off, would not change my thesis"

While you can't bound the uncertainties of the stock market precisely, you can begin to frame them.

Turning a few uncertainties into risks helps you, as @kermitcapital says:"Buy right, and sit tight"

Stay safe out there.
LlTaylor's avatar
Hey Nathan I like risks too. When I think they are calculated and the odds more likely to be in .y favor.

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