“The only thing that is constant is change”.
— Heraclitus
Everything in the world is constantly changing, people include you and me, all companies from Apple to Tesla and our environments like COVID-19, geopolitical tension, etc.
That’s why it’s crucial to have VIT/PIT in mind to evaluate the accurate company PD at any point in time (PD is changing too!) as a reflection of a series of events’ influence. It is encouraged to have 4BOT in mind while exploring the framework.
Just to begin, In the VIT/PIT: V/P stands for Validity/Probability, I for impact and T for timing.
V or P: Validity or Probability
The first thing to consider is V/P, while the only difference between them is either the event happened, or not. If it already happened, the Probability = 1. But the biggest underlying question is, “Is it true?”
In order to get our lent/invested money back, we can never be over-serious. As a recent notorious example, Hin Leong Trading Pte, Ltd. A substantial part of its oil inventory as collateral for bank lenders; however, CEO OK Lim instructed Hin Leong Trading to sell. For bank, the collateral was not even there anymore.
For the future events, then it’s the question of “how high is the probability to happen”. A company’s AR is naturally a great example. Can AR be collected successfully? What happened in the counterparty is close to default soon – then how likely AR can be collected?
Impact
The 2nd step is the quantify the impact comprehensively, and sometimes can be quite catastrophic.
Apr 4th 2017, Imagination Technologies (IMG.LON) plunged as much as 72%, as Apple planned to stop licensing the firm’s technology. Unfortunately, Apple is the largest buyer to the company took over 60% of its revenues. The impact is obvious: a big chunk of sales will disappear. As a consequence, the company has to cut all kinds of expenses, leases/personnel’s, etc.
Usually, it required lots of insights to evaluate the impact. Just imagine the COVID-19, it impacted worldwide economies, leading to country-level shutdowns for a while and countless aftermath effect. That’s when we can turn into specialists like consulting/advisory/etc. to gain a better estimation.
Timing
The last step is to put back into the timeline. The event impact might not get realized until sometime later, or will last for many many years.
If you’re amazed about Tesla’s car design and performance, you probably don’t know the car-making decision by Elon musk can trace to years back. For a company to achieve a great goal, the decision and efforts were taken long before it gets materialized or even noticed by the public. Vice-versa, the same story for a company goes total bankruptcy – problem must start to show up somewhere.
Therefore it worth nothing if no timing involved in any kind of decision, or assessment.
VIT/PIT is no more than a conceptual framework, but it’s extremely useful when assessing all kinds of internal & external events impact and to get accurate PD. Remember the 6DOS (6 Degree of Separation)? That’s exactly where you went for the classification on what to look at!