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Risk vs Uncertainty

By September 9, 2022October 27th, 2022No Comments

I recently read The Dhandho Investor by Mohnish Pabrai. The biggest lesson I took away from his book was this:

There’s a difference between “risk” and “uncertainty.”

Risk refers to what you might lose. You are always risking “something” in exchange for the possibility of getting something else. How much does it cost you just to play the game?

Uncertainty refers to the number of possible outcomes. Some are more probable than others.

What I find fascinating is that you can detach the two and see them as completely separate factors while making a decision.

You can have high risk, but low uncertainty. Or low risk, high uncertainty, etc.

Low risk means that even if you don’t win, you don’t lose that much. So if you DO win, you hit it out of the park.

An example of this is being able to buy a business at an extremely discounted price. With that low of an investment to get in the game, you have tremendous upside, even if there’s higher uncertainty.

The second key takeaway from Mohnish (as well as other legendary investors I know of) is that they put a lot more emphasis on keeping their “risk” as low as possible. They look for heavily discounted, troubled assets that they think they can turn around quickly and cheaply.

“You make your money on the buy.” – Manny Khoshbin, real estate tycoon

This advice somewhat flies in the face of conventional wisdom. Humans are drawn towards certainty – whatever seems “sure.”


I see this as a very interesting way to grow wealth and choose which projects to take on.

Choose projects where I can reduce my downside to as low as possible, so that all that remains is a stratospheric upside.

A big part of this is finding other people to help finance your cost of getting into the game. But there’s also another facet of cost: opportunity cost.

Cost is not simply about what you put in, but also where else that time, money, and effort could have gone. THIS is why Warren Buffet often uses the analogy of a bingo card – imagine you can only ever make 20 investments. You would be much more disciplined in how you choose them, right?

This also goes back to what I believe about mortality. You may have only a year left to live, or you may have 70. How do you decide how to spend each year you have left?

Basically, first and foremost, do what floats your boat. If a project doesn’t make you feel alive, it’s simply bringing you closer to death.

Second, I want to do things that can grow geometrically, not linearly. That’s how time becomes your friend. That means domino/network effects and virality.

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