Some of my older readers may recall Bob Dylan’s song – “the times they are a-changing” – words from yesteryear – and yet so relevant to the situation in South Africa at present.
With a very significant political event about to take place from the 16th to the 20th December, to the unthinkable drama surrounding one of the pillars of ethics and good corporate governance, and now the somewhat amazing revelations about a major South African and international retailer.
One has to wonder – what’s next?
What other “black swans” are lurking around the corner?
In his book, The Black Swan- author Nassim Nicholas Taleb describes a “black swan’ as having three main characteristics:-
Firstly, it’s an outlier – outside the realm of regular expectations, secondly, its impact is extreme and finally, we attempt to concoct explanations after the event, trying to make it explainable and predictable.
I could imagine that Britain’s “yes” vote for Brexit or the 2004 tsunami that engulfed Thailand might be recognised as black swans.
The point is – if it is so far off the radar screen – so unexpected – how can we ever prepare for it?
I suggest, in truth, we cannot.
So, what can we do?
I recently had the pleasure of interacting with someone in the security industry, who has developed algorithms that are designed to move away from “reactive” security to “predictive” security.
The concept is quite fascinating.
He made the point that the vast bulk of current security interventions are executed in response to a security incident – not proactive.
In a similar fashion, how many times does business management react to an event – and how many times are they caught unawares – without some form of pre-planned response?
In the rapidly changing times in which we live and operate our business activities, it is simply no longer good enough to be reactive.
As management we need to be proactive – in essence predictive.
Easier said than done?
Undoubtedly – but there are a few basic principles which can make the predictive process more effective.
From a corporate perspective, the most important is the holistic appreciation of the business case – identifying the key fundamentals and business drivers of the various elements that combine to drive shareholder returns – and being able to quantify them.
Secondly, incorporating these drivers into a comprehensive financial a model and allocating a range of alternative values to same – thus enabling management to generate a variety of scenarios and what –if analysis – a range of possibilities.
Effective financial models are not perfect – no prediction is – but provided they are based on current best practice incorporating flexibility, logic, sequential structure and financial integrity – they offer the best available option for predicting future outcomes.
Colin Human
Goalfix Financial Modellers
