Andy Kessler: NYT: Trust Me

Membertools_timesselect76 Is there trust anymore? We are caught between Obi-Wan Kenobi saying, “Let go, Luke. Luke, trust me,” and Eric “Otter” Stratton in Animal House declaring, “You [Delta House language] up. You trusted us!” Heck, the civilized world still shakes hands to show we aren’t packing daggers. In business, “trust me” often turned out to be the two most dangerous words in America.

Joe Nacchio is the latest trust-destroying manager, convicted on 19 counts of insider trading and dumping Qwest stock while smiling to shareholders. Names like Ebbers, Kozlowski, Skilling, and Martha are now synonymous with fraud, scandal and even in polite conversations are likened to the thin film that covers standing ponds. (I did meet Martha once, and she gave me a recipe for flourless waffles, so let’s give her a pass, shall we?)

Wall Street research was long ago disgraced, but add to that mutual fund late trading, options backdating, onerous interest ratings and insurance premium overinflating, and what you have is a lot of folks whose reputations have been shredded into scraps finer than Arthur Andersen documents. And the government? Given all the lying in D.C. on both sides of the aisle, you would think Scooter Libby’s defense would have been selective enforcement.

So here I am at my Carrie Bradshaw moment: Will we ever trust anyone again?

Absolutely. More than ever. Oddly, the scandals that opened the 21st century got us thinking about and working towards trust.

The truth is that on Wall Street, trust has ruled for a long time: trillions of dollars in stocks, bonds and currencies trade every day, usually over the phone by folks who have never even met in person. I learned early on in my career that all you have on Wall Street is your reputation. You can cut corners, cross into some gray area and screw someone, but only once. Word travels fast. Violate your customers’ trust and no one will ever do business with you again. Stupidity is accepted at some level, but dishonesty is a capital offense.

It’s the same with investing. I spent two decades visiting companies, once a quarter, even once a month, to see how things were going, looking into the eyes of management and figuring out if we were being told tall tales. Not easy. If they had all lied, I would have never found a decent investment. Instead, most were honest, albeit opinionated. I would just avoid the stock of anyone that I caught telling me a lie, no matter how small. That saved me many times.

The stock market sorts this out, too. Collectively, investors vote on how much they trust management to deliver the goods, so to speak. In manufacturing economies, it’s about the quality of widgets. But that’s Japan, South Korea, China. It’s harder to fudge the accounting when there are boxes or autos to count. In a service economy like the U.S., trust and reputation are the cornerstones of the economy.

There are plenty of things I don’t trust – like Wikipedia. I’ve watched my 15-year-old son and his friends take turns editing the page for the animated film “Land Before Time,” flipping the gender of the character Littlefoot from he to she and back.

Or online polls. Years ago, Howard Stern disrupted a People Magazine “Most Beautiful People” poll by getting his listeners to write in votes for Hank the Angry Drunken Dwarf, who won in a landslide over Tom Cruise and Julia Roberts. He almost did it again by drumming up votes this month for Sanjaya Malakar on “American Idol.”

These are childish examples, but let’s face it, Madison Avenue makes billions using media to bestow integrity on companies and products that may or may not deserve it. Coke Zero. The Ultimate Driving Machine. Just Do It. How do we separate honesty from crafty spin?

Well, the people are doing it for themselves. Sort of. Ebay uses a feedback system. Every time you buy or sell something, you have a chance to provide a rating on the transaction. Let’s say, a Bebe hot pink rhinestone halter-top is offered by sunoptic005 — current bid, $19.99. I am not normally one to trust cryptically named sellers from Alhambra, Calif., but this one’s feedback score is a whopping 619 and with a positive feedback of percentage of 97.1, I have no worries — I’m in.

But it’s bigger than that. Google has created a $150 billion business with a simple algorithm called PageRank, where Web sites vote on how good other sites are by pointing to them. No democracy, votes by “important sites” count more than others. More votes, higher relevancy. And we all know how much the world’s daily business is driven by Google.

Am I the only one to notice that these feedback systems are no different from the robust network of adolescent girls (in Bebe halter tops) at their high school lockers (once operating via Princess phones and now via text messaging). The kinks have been worked out of this system since the beginning of time. Perhaps others in the business world are now just codifying it to fill an important need.

Is this the next big thing? Some digital mutation of social networking? We’ll electronically keep track of all our friends and how much we trust them? A new field in Microsoft Outlook – Believability: 0 to 100 percent. Well maybe, but I suspect it will be much more subtle than that. The gossip of a stellar reputation or bad rap travels faster than electrons.

Trust your investments and invest in trust — probably not a bad credo. What I mean is make sure you can trust the management of the companies you invest in to deliver profits. Have they done it before, have they proved to be credible, are they just blowing marketing smoke or are they selling into a real growing market? All good to know. On the flip side, investing in markets that help quantify or institutionalize trust may be the next growth market.

Today, ideas are worth more than factories. Google is worth more than the U.S. auto industry and most airlines combined, with room for a brewery or two to boot. Services are two thirds of what we do in this country. And by service I don’t just mean just a smile with your change at the local Denny’s but service at all levels of big pharma, Hollywood, designer couture, internetworking routers, retirement planning, podcasts. This is what we are good at. And the world beats a path to our door for it.

But like sugary Coke, Pepsi and RC Cola, not all service providers are created equal, and there are no taste tests for them. Your baker only needs to have tasty buns, but you most likely pick your doctor, banker, realtor or broker based on some intangible — a recommendation, a reputation, some form of trust. If you don’t, I suggest that you fire them before the sun comes up again.

And a personal recommendation: Protect your reputation with a vengeance. Once lost, it is hard to earn back. At the end of the day, it’s all you really have. In this interconnected world, you can’t move to another city and start again. Despite the scandals and villains frog-marched through our judicial system, or maybe because of it, honesty and trust are making a huge comeback. Trust, integrity and reputation are no longer buzzwords — they have become our currency for commerce. Trust me on this one.

http://kessler.blogs.nytimes.com/2007/04/25/trust-me/

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