How much should we care about uncertainty?

 In the field of investment, there are several types of uncertainties. Firstly, black swan is a type of uncertainty, and I think it is the most influential uncertainty, as it is unpredictable and it is not included in our strategy design at all. However, since it is unobservable, we cannot add it to our consideration anyway; therefore, we do not care about risk, it is not because we do not want to care, it is because we are unable to care. Secondly, the observable risk is another source of uncertainty. For this type of uncertainty, we also can have two types of such risk. One type is that the risk is uncorrelated with individual fundamental, beta and variance are often used to measure such risk. I do not think such risk is the risk that we need to care about. We often consider too much about the entire market environment. However, comparing with the entire market, individual fundamental is much more determining. After a financial crisis, some companies disappear and some companies keep being strong, the classic example is Goldman Sachs and Lehman Brothers. Moreover, due to the Law of Large Numbers, the average of the results should be close to the expected value when the number of trials increases, this means when a stock is traded many times, the variance will diminish and can be ignored.  The other type is that the risk is correlated with individual fundamental. Such risk can determine the trend direction rather than the variance. This is the risk that we really have to pay attention to. When facing such risk, we have several strategies. We can either accept the risk and have higher expected returns when bearing higher risk, or have some degree of deviation in our portfolio that we lower the risk but also lower the expected returns.

To conclude, among all types of uncertainty, we should only focus on the observable risk that can potentially change the fundamental.