The accepted mantra in today’s markets is that as a nation we are suffering from a crisis of confidence. And it is true. But the root cause of our “crisis of confidence” is, in my opinion, a crisis of credibility.
Over the last several months, countless individuals, organizations, companies, or government officials have taken actions or made statements that sought to reassure investors, only to have these reassurances blow up in their face in the ensuing weeks and months. While this certainly hasn’t helped to restore confidence, it was also largely out of these folks’ control as their statements where overwhelmed by a tidal wave of economic pessimism. This has had the unfortunate consequence of causing other credible sources to be leery of making any reassuring statements for fear of also being steam rolled. Even though this is understandable, this “sitting on the sidelines” mentality further stoked the already rampant fear and panic in markets.
What has been worse, in my mind at least, though, is that the few credible sources that were willing to speak—or had the power to act—have continuously changed their statements or opinions, which have had the unintended consequence of showing how uncertain these “credible” sources really were about what was going on, and what was going to be done about it. In fact, many of these folks might have simply been better off saying nothing, rather than constantly changing their minds, and further fueling the fire of uncertainty.
Credibility is, in fact, acquired when people, or organizations, are consistent in their statements and policies. In layman’s terms, people become credible, or believable, when they consistently say what they do, and do what they say. To me, at least, it really doesn’t seem that difficult. And when someone acts in this manner, it gives them credibility, which then inspires confidence and trust, which I believe, would help to break the negative psychological feedback loop that most markets and investors are currently experiencing today.
One of the reasons I respect Berkshire Hathaway (BRK-A) Chairman Warren Buffett is because, in my opinion, he understands the importance of credibility both for a person and an organization. I would argue, that one of both Berkshire’s—and Buffett’s—greatest assets is its credibility. And, thankfully, Buffett is spending some this asset by continuing to stand-up and make appearances—such as he did this morning on CNBC—to reassure markets and citizens about the power of our economic system to create an even better economic future. I applaud these actions, and I couldn’t agree more with this stance.
But even Berkshire and Buffett has limits to its credibility, which you have seen played out this year. Buffett’s decision to become more involved with some derivative contracts, especially after warning about their risks for years, has certainly impacted some of Berkshire’s near-term credibility, despite, what I think, are the favorable long-term economic characteristics of these positions for shareholders. And it appears as though the market recognizes this, as Berkshire’s share price has certainly been impacted over the last year, despite its relatively good performance vis-à-vis many other businesses.
I don’t point this out to be overly critical, but I do think that it illustrates part of the fragility of credibility, and the importance of our leaders (both public and private) to be consistent in both word and action. In my opinion, this approach will help build credibility, which may inspire more folks (other than only Buffett these days it seems) to make reassuring statements, thereby leading to more confidence and trust, which ultimately will help to break as Buffett says, “the negative feedback loop” we are currently embroiled in today.
You might be interested to know that buffettologist.com was recently mentioned in a Bloomberg article, which I have linked here.
Justin
Monday, March 9, 2009
The Crisis of Credibility
