Fog-of-Uncertainty Valuation Test
Use extreme uncertainty to find prices with asymmetric risk and reward
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 94%
The Fog-of-Uncertainty Valuation Test treats uncertainty as a potential source of mispricing rather than merely a reason to avoid markets. First, identify the outcome investors appear certain about and test credible alternatives that would challenge it. Then examine whether fear, enthusiasm, or crowded positioning has pushed valuation or the equity risk premium to an extreme. At that point, the decision rests less on predicting the exact news path and more on whether the price provides asymmetric protection. Deeply discounted assets can offer attractive returns even when the near-term outlook remains unknowable; excessively priced assets can be dangerous despite a popular narrative. Investors act only when the imbalance is large enough, accept imperfect timing, and continue monitoring whether the valuation-based margin of safety remains intact.
Origin
Mike Wilson used the phrase “fog of uncertainty” on Masters in Business to explain why confusion during events such as COVID can produce unusually large valuation mismatches.
Core principles
- 01Confusion creates wider pricing errors
- 02Price can provide protection when forecasts cannot
- 03Extreme consensus can be as dangerous as extreme fear
- 04Contrarian action requires an unbalanced risk-reward profile
- 05Valuation matters most when it reaches an extreme
How to run it
- 1
Map the Consensus
State the economic, earnings, or policy outcome currently embedded in prices. Record how confident investors appear to be in that scenario.
Pro tip Use valuations and positioning, not just surveys or commentary, to infer consensus.
Watch out A widely discussed risk may already be fully reflected in prices.
- 2
Challenge the Assumption
Develop plausible scenarios that differ from the consensus without requiring an extreme forecast. Determine which assets would be vulnerable or resilient under each alternative.
Pro tip A narrative only needs to be challenged, not completely reversed, to cause repricing.
Watch out Do not manufacture contrarian scenarios solely to justify an existing position.
- 3
Measure the Mispricing
Compare current valuation, risk premiums, and expected returns with historical ranges and scenario outcomes. Look for extremes that provide a meaningful margin of safety or signal excessive optimism.
Pro tip Use several valuation measures when accounting or economic data are unusually noisy.
Watch out Cheap assets can remain cheap when their fundamentals are permanently impaired.
- 4
Test the Asymmetry
Estimate the potential gain if uncertainty clears favorably and the loss if the adverse case occurs. Proceed only when the expected payoff is materially unbalanced in your favor.
Pro tip Include the possibility that consensus is broadly correct but current pricing is still too extreme.
Watch out Do not confuse a common correction with a once-in-a-generation opportunity.
- 5
Take a Sized Swing
Enter with a position size that can survive continued volatility and imperfect timing. Add only if the thesis and valuation improve rather than merely because the price falls.
Pro tip Use staged entries when the uncertainty has no identifiable resolution date.
Watch out Excessive leverage can destroy a sound valuation thesis before it pays off.
- 6
Reassess as Certainty Returns
Monitor whether prices normalize, fundamentals deteriorate, or the consensus changes. Reduce the position when the asymmetry disappears.
Pro tip Define the valuation condition that would make the opportunity fully priced before entering.
Watch out Do not overstay after the original pricing mismatch has closed.
In the wild
During the pandemic panic, investors could not forecast the disease, shutdowns, or recovery with confidence. Wilson instead focused on the equity risk premium reaching roughly 700 basis points, judging that the price offered sufficient compensation even if the market did not rebound immediately.
→ The valuation extreme supported a bullish decision near the market low without requiring certainty about the pandemic path.
In early 2021, free money and speculative enthusiasm drove meme stocks to prices unsupported by sustainable fundamentals. Applying the same uncertainty framework in reverse highlighted extreme optimism and poor downside protection, supporting an exit from the most expensive names.
→ The investor avoids substantial losses when speculative valuations normalize.
Common mistakes
Demanding Forecast Certainty
Waiting until every fact is known usually means the market has already repriced the opportunity.
Being Contrarian Without Valuation Support
Opposing consensus is not enough; the price must offer a demonstrably favorable payoff.
Ignoring Position Size
Even an attractive long-term price can fall further while uncertainty remains elevated.
Is it for you?
Best for
It is best for valuation-aware investors assessing market dislocations, panics, bubbles, and crowded consensus positions.
Not ideal for
It is not ideal for investors who cannot tolerate volatility or who lack a disciplined valuation process.
From the transcript
“when things are really confusing, like during COVID, for example, you had incredible value opportunities that popped up because nobody knew anything, including us, but…”
“the fog of uncertainty creates those mismatches by the way, it creates on the upside too.”
“Those types of calls tend to happen when things are extreme levels. You see the risk reward being unbalanced, and you take a swing.”
From the episode
From Investment Banker to CIO with Mike Wilson
Mike Wilson