Credibility Premium

Everyone knows what’s been happening in the financial markets and what has happened to get us here. Panic gripped the markets beginning with mortgage finance and has spread into every corner of our market. Now our country’s financial system is lacking its most important element: confidence. Our system of banking and short term lending is heavily dependent on trust in counterparties…trust in government…trust in regulators and credit rating agencies. Right now the market has none. As we’ve just experienced first-hand, trust is ruined very quickly and could take a long time to rebuild. CEO after CEO has stared straight into the TV cameras explaining how their company is in ship-shape, only to announce large losses and massive common shareholder dilution a few weeks (or days) later.

Two weeks ago Warren Buffett made news by investing billions into Goldman Sachs and General Electric through preferred stock and warrants. It has also been well publicized that he made the investments on great terms for Berkshire Hathaway. Both GE and Goldman essentially gave him a discount in exchange for supplying capital, perhaps for providing liquidity in an illiquid market–but that does not likely explain the full premium.  As investors have lost faith in the institutions that we thought were the bedrock of the entire US economy, from the investment banks to the Federal Reserve, Warren Buffett remains one of the rare bright spots with a large amount of credibility remaining during this panic. It seems to me that the two firms could have found equity financing on better terms elsewhere, but Buffett has built up such a great reputation that GE and Goldman paid up for the “credibility by association” deal with Buffett. It’s as if they are saying to the market, “Everything is okay now, we have the world’s greatest investor watching over us.” Make no mistake about it, Buffett’s intentions about building a powerful reputation throughout his long career have paved the way for deals like these.

As aspiring entrepreneurs in the digital age, you and I must be even more conscious of the reputations we are crafting as we set out to establish ourselves in the business world. Nowadays we leave a readily accessible timeline of our lives and our digital fingerprints are left on most everything we deal with.  If you are working on a startup, new information about it (good or bad) can spread like wildfire via the internet. In the age of Google, there are dozens of websites dedicated to sharing customer reviews, and the whole world can watch your every move. Your past becomes your present. Having a digital identity is probably a net positive for 90+% of entrepreneurs and job seekers, as you can try to carefully censor what gets on the web about you and strive to put your best face forward. Either way, you are constantly molding your reputation, so it’s how you do things that matters most.

Mr. Buffett puts it best: “It takes twenty years to build a reputation and five minutes to ruin it. If you think about that you’ll do things differently.” It will take confidence to get our financial markets and economy going again, just as it will take confidence and credibility to get your own entrepreneurial venture established. Work on your reputation diligently, then guard it with your life, so you too can eventually receive a ‘credibility premium.’