The Perils of Reputation

Another case study in investor seduction. Dreier swindled some very sophisticated people.

As far as I can tell, the foundation of Dreier's (short-lived) success as a con artist, the reason he got in the door to see all those hedge funds, was his mere reputation as a high-profile attorney representing high-profile clients.

Reputation, and its close cousin pedigree, is the largest early filter money manager selectors use when evaluating fund managers. Simply put: for whom did you work before you started your fund? It's probably a necessary filter, but every tool in the manager selector's toolbox has its weaknesses.

I hope to expand on this in a later post, but in the context of this one I'll note three of the weaknesses of the reputation filter:

• The first is obviously that a good pedigree, in the wrong hands, can be wielded as a tool of seduction, of con artistry.
• The second is that reputations rise and fall, and the fall is often swift. Warren Buffett famously said that it takes a lifetime to build a reputation and five minutes to ruin it. Somebody has to be sitting at the other end of the table during the five minutes, and you don't want it to be you.
• The third is that for all its importance, the reputation filter is a commodity, and so adds little value to the manager selection process. I know where you used to work and how much your old boss loves you, but so does everyone else.

Comments

[Leftfield]

People use those filters or shortcuts to categorize so automatically now that politicians can get elected or never get the chance based purely on name recognition.

I work with musical instruments and the few best-known names get disproportionate attention and money along with visual condition. Some lemons sell well for that reason.

It appears the average person is so ill-informed that they are satisfied with a Summers, a Geithner and the other retreads who helped cause our current mess due to name recognition.

I hope that our present leaders who are the most amazing toxic mix of overpaid, clueless and harmful finally suffer the reputations they deserve. Unless we have the miraculous recovery and emergence from debt that leaders with their pay scales should be able to bring us.

2009 Apr 06 09:54 AM

[WhereAreTheCustomersYachts]

Most underrated instruments makers?

2009 Apr 06 11:25 AM

[WhereAreTheCustomersYachts]

Leftfield,

What are some OVERRATED musical instrument manufacturers?

What are some UNDERRATED musical instrument manufacturers?

2009 Apr 06 11:26 AM

[Leftfield]

I don't say the manufacturers are under or overrated. I'm saying that everyone knows certain names; Gibson guitars of whatever. I work with wind instruments, so, Powell flutes, Selmer saxophones. They're great companies, but they all play differently and some not so well, for me. I am mostly interested in instruments that don't bring the big bucks that I think are often the very best. Vintage US-made Conn and Buescher saxophones. Some Armstrong Heritage flutes (vintage ones) sell cheaply and are excellent. Most of these have sounds that nothing made today has, period. That's just my interest. Thanks.

2009 Apr 07 07:24 AM