One wall in the offices of Davis Advisors in New York is known as the "Wall of Shame." It is lined with framed certificates of stocks that turned out to be poor investments.
Under each stock certificate is one sentence specifying the lesson learned from the ill-fated investment.
"It's part of the Davis culture to acknowledge our mistakes, to examine them and to learn from them," said Chris Davis, chairman and chief executive of the firm that manages $58 billion, $10 billion of it institutional tax-exempt assets. "We don't hide our mistakes, and we don't punish people for mistakes."
There are two kinds of mistake: mistakes of quantification, and mistakes of judgment, he said in an interview. Mistakes of quantification are the easiest to correct.
An example of a mistake of quantification would be failing to recognize the difference between depreciation and the required maintenance capital spending. "That's a lesson we learned with Burlington Northern, which is a very well-run railroad," Mr. Davis said. "But the amount they have to spend to keep the trains running is significantly more than their depreciation. So the available earnings that could be distributed were lower than you might get from simply looking at cash flow and so on."
As a result, a Burlington Northern stock certificate hangs on the Wall of Shame.
You can learn from mistakes of quantification, improve the process and never make the same mistake again, Mr. Davis said.
"The hardest mistakes to learn from are mistakes of judgment," he said. "The only way to learn from mistakes of judgment is to see more situations, more cases.
"They are tougher because each one looks a little different. What did Tolstoy say about unhappy families? Each one is different after its own fashion. Those we put up on the wall and then try to look for what is generalizable.
"For example, the Hewlett-Compaq deal. The lesson on it starts with a quote from David Packard who said: ‘More companies die of indigestion than from starvation.'
"And there's more detailed explanation about the tendencies of CEOs to want to be in more glamorous businesses if they are in dull businesses that are more profitable."
The Wall of Shame, said Mr. Davis, fosters an open acknowledgement of mistakes and how to avoid them. Willingness to acknowledge mistakes is part of the culture of open exchange of ideas. Mr. Davis said he believes culture is an important determinant of success or failure in an investment management firm.
"Too many consultants look at performance, process and people when they're evaluating managers," Mr. Davis said, "But they've got the order wrong. They should look at people and culture first, and then look at process and performance. People and culture drive the process and the performance.
"When we think about culture we ask: What is it in a culture that makes people to take risk? When I think of the investment operations that work, it tends to be because they allow all the things that aren't allowed in corporations if you want to get ahead. They allow mistakes to be made, to be discussed."
"If you want symptoms of a good culture, you look at compensation, at what the incentives reward, but you would also look to see if there is genuine intellectual curiosity, and passion," he said.
"Every great investor and every great firm that has a great culture has some sense of mission that is beyond making money. I think of it as an investment culture vs. a marketing culture."
