Episode #420: Dan Cooper, ROC Investments – ROC: Return on Character
Visitor: Dan Cooper is the founder and CEO of ROC Investments, which allocates capital on the premise of the behaviors of the CEOs and their senior government groups.
Date Recorded: 5/11/2022 | Run-Time: 50:11
Abstract: Dan shares how he ran a method targeted on investing in corporations with CEO’s that show excessive character earlier in his profession. When he later regarded again on the returns and located conventional elements solely defined 30% of the technique’s outperformance, he determined to launch an ETF based mostly on that technique, ticker R-O-C-I.
He shares how he defines character, how he quantifies it, after which how he implements it right into a portfolio. Lastly he shares what CEO’s exemplify this technique with tales of executives of Costco, Southwest & Microsoft.
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Hyperlinks from the Episode:
- 1:11 – Intro
- 1:54 – Welcome to our visitor, Dan Cooper
- 4:26 – What led Dan to launch an ETF targeted on character
- 8:51 – The unique idea of creating a guidelines based mostly character fund
- 11:00 – How Dan decides who’s a high-character CEO
- 18:48 – Quantitative research and the way to consider this as an funding technique; Return on Character
- 22:32 – Overview of how the composite rating works, how usually the technique rebalances, and the way he handles CEO turnover
- 31:36 – Overview of his newly launched ROCI ETF
- 33:33 – The preliminary reception and views on a personality index fund
- 37:26 – What else is on Dan’s thoughts?
- 38:56 – Would publishing their record incentivize higher habits from CEOs?
- 42:42 – Episode #323: John Montgomery, Bridgeway Capital Administration
- 43:31 – Different ideas and insights about Dan’s technique and the ROCI ETF
- 44:58 – Dan’s most memorable funding
- 46:43 – Study extra about Dan Cooper; rocinvestments.com; LinkedIn
Transcript of Episode 420:
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Meb: Welcome podcast listeners, we’ve got a very enjoyable present for you at present. Our visitor is Dan Cooper, founder and CEO of ROC Investments, which allocates capital on the premise of the behaviors of the CEOs and their senior government groups. Dan shares how he ran a method targeted on investing in corporations with CEO’s that show excessive character earlier in his profession. When he later regarded again on the returns and located conventional elements solely defined 30% of the technique’s outperformance, he determined to launch an ETF based mostly on that technique, ticker R-O-C-I. He shares how he defines character, how he quantifies it, after which how he implements it right into a portfolio. Lastly he shares what CEO’s exemplify this technique with tales of executives of Costco, Southwest & Microsoft. Please get pleasure from this episode with ROC Investments’ Dan Cooper.
Meb: Dan, welcome to the present.
Dan: Nice to be with you.
Meb: Redding, California. What are you doing up in Redding, close to Mount Shasta? I’ve hiked that when upon a time.
Dan: You probably did?
Meb: I did.
Dan: Yeah, I did it too. It’s definitely worth the hike. It’s acquired a terrific view, supplied there’s not smoke within the space. And we’re getting loads of that lately up right here in Redding. We’ve been right here since 2012. I moved my household right here, along with my spouse. We now have two boys, and we love clear mountain streams, and rivers, and lakes, and mountain mountaineering, and tenting. We do a ton of tenting.
Meb: The hike up climb up Shasta for me, I did it on my own, and I made the error of doing all of it in in the future.
Dan: Oh, wow.
Meb: It was really very difficult. However I had a second the place you begin at no matter time is the morning, it was 3:00 within the morning or one thing. So, I went to a movie show in Redding, or wherever it was. It was too low-cost to pay for a resort room as a result of I knew I used to be going to be leaving at 2:00 within the morning and whatnot. So, I went to the flicks, slept in my automotive, awakened, and began strolling in the course of the night time. And listeners, in case you’ve by no means been mountaineering at night time, it’s a really discomforting feeling for the primary quarter-hour and even the longer, proper? Like, that is bear territory, maybe. However it was like a full moon. And one of the crucial non secular, simply memorable moments of my life was strolling. I simply ultimately turned off my headlamp, so that you’re simply strolling in the dead of night and this path. And ultimately, you come out of the forest and also you see Shasta with simply stars behind it. And I used to be identical to, “Wow, okay, that is tremendous particular.” Anyway, superior journey. I keep in mind sliding down with my axe, my ice axe, and sitting on my backpack to go down approach sooner as a result of I used to be exhausted at that time. I keep in mind very particularly attending to a pace the place I believed, you already know what? There’s no turning again, however I’m going approach too quick. And in case you’ve ever seen these movies on TV the place folks’s just like the ice axe by their leg, like, I used to be having flashes that I’m like, “I’m going to finish up at this…”
Dan: It’s going to occur. They’re going to have a begin. My favourite second on Mount Shasta was we awakened early identical to you guys, otherwise you did if you’re by your self. We acquired about halfway up the mountain and the solar began developing and the shadow of the mountain fell on the clouds under. It was a particular epic second. It’s a particular journey. It’s value doing. And it’s very approachable right here for Californians. It’s not arduous to get to.
Meb: I’ve so many enjoyable tales. All proper, so, we’re going to speak about all issues ETFs, character. I wish to hear a little bit bit about your background. You bought a enjoyable origin story. You spend a while on another international locations and continents. Give us the timeline origin story for Dan.
Dan: Yeah, man. I began off fairly humble, nonetheless am fairly humble, labored my approach by faculty working my poison ivy killing enterprise in Boston the place my mother and father reside. I used to be generally known as Dan, the poison ivy man. All people had it, no one needed it, and I used to be the one one silly sufficient to go do away with it. So, after I graduated from faculty, that’s all I actually knew the best way to do. However a man named Joe Ritchie grabbed me out of faculty. Joe Ritchie based a reasonably well-known buying and selling firm, which was referred to as Chicago Analysis and Buying and selling, CRT. And so they have been the most important choices and futures agency on the planet again then. And so they traded I believe one thing like ridiculous quantities within the quantity of whole market. I joined him after he had bought to Financial institution of America. We have been managing his personal cash. We all the time had quant fashions going that Joe was creating. We’re allocating capital by personal fairness and venture-type methods all around the world.
However we additionally did these loopy overseas diplomacy prompts. Joe would take his affect and attempt to make a distinction in Washington on areas of the a part of the world that he thought we’re lacking from a coverage standpoint. So, we labored on attempting to assist Iraq after the primary invasion with the financial sanctions, working with the three spiritual leaders there. After which we’re in the course of Afghanistan pre 9/11. Two years earlier than 9/11, Joe and I have been working in Washington to attempt to discover a technique to overthrow the Taliban. And all these jobs form of opened the world to me in a approach that was simply unbelievable. The opposite factor I did with Joe’s after 9/11, I used to be uninterested in overseas diplomacy and politics. I launched the primary character fund. That’s based mostly on what I’m doing at present.
Meb: What’s the yr within the timeline?
Dan: That was early 2000s, within the early 2000s. It got here from a dialog the place Joe and I used to be sitting round and he goes, “Man, I simply want I knew who the great ones have been, who the CEOs that really have character as a result of I believe that’d be an unbelievable long-term predictor of a efficiency of an organization.” And he was all the time coming at it from the standpoint of a coach. He stated, “It’s going to be troublesome to research Wall Avenue and each facet of taking the recognized knowledge swimming pools and reduce them in numerous methods.” However I believe we could possibly be higher than the market at understanding this one phase of the market, which is character. And on the time, I used to be studying Collins’ guide, “Good to Nice.” After which, I used to be additionally attempting to convey an organization to Japan referred to as Tal Plus [SP] out in Nebraska. And so they develop behavior-based interview programs to quantify the diploma during which an individual matches a job utilizing an interview course of. And so, I put two and two collectively and used Collins’ findings round stage 5 leaders as the standards. And so they constructed a behavior-based interview round that and began speaking to everyone on the road, analysts. We scored the CEO purely on the premise of this one standards after which allotted capital.
Initially, we went quick. We additionally form of surveyed for the unhealthy guys. And we had a nasty man record and particular person record. And we went quick. The unhealthy CEOs, alongside the great ones rapidly realized that the shorts form of have been consuming our shorts, actually killing us, as a result of they have been the very best at manipulating reality.
Meb: They exist within the pump and dump world. And it’s humorous, by the way in which, you observe among the actual unhealthy, which, surprisingly, usually, for some cause, appeared to be situated in Salt Lake Metropolis, Vancouver, another locales. However they proceed to have 9 lives, which is form of loopy to me. It’s like usually, you see the CEO then you definitely’re like, “Okay, that was completely atrocious. I’d by no means put money into that particular person once more.” However then they simply type of, like, resurface, like, a yr or two later some place else.
Dan: Identical factor in politics. I imply, it’s superb how the market forgives. So, we acquired out of a brief enterprise. It turned a market timing sport, and we weren’t out there timing. We simply form of ran longs. So, that’s how the technique first acquired began. It was fairly fascinating.
Meb: That’s a enjoyable inspiration. How early within the course of was this one thing that was quantified? And possibly it was from the get-go. And my notion, it’s like, you’re sitting across the early days, like, “All proper, this man’s whole wanker. This man is clearly a liar. This man is working this for his personal private profit,” no matter, on and on and on, or the place you, like, you already know what? That is really going to be a framework. We’re going to attempt to be rules-based and goal. What was the unique idea and the way has it developed over the previous decade plus?
Dan: The unique idea was very rules-based. It wasn’t sitting round saying, “Hey, Bob over there’s a actually good man.” And one of many issues we realized actually fast, Meb, was that individuals that knew CEOs on the golf membership or church pews didn’t know CEOs. I imply, one of the best ways to get to this understanding, the holy grail of this method is knowing folks which might be within the trenches with the CEOs. And so, I’d converse with Wall Avenue analysts again then and ask them questions like, “Of the businesses you observe, who do you suppose may put the corporate earlier than their very own pursuits? Who tends to be extra humble than they’re smug?” And so they couldn’t simply say… They might really say, “Okay, give me a narrative. Give me a cause.” That knowledge and that data relayed would then form of be markers that we might be capable to use in our grading scorecard for every dialog and each bit of information that we discovered that was related to the data we’re on the lookout for. Every CEO had a distinct rating, and it was all pushed by this evaluation. And so, we’re form of attempting to create a stability sheet nearly on character and apply it and actually attempt to pressure a self-discipline round it. And I believe that’s actually vital as a result of this isn’t opinion-based. You might be on the market looking for markers of character. I imply, loads of the issues that the road form of throws out on the ground doesn’t know the best way to worth. And we predict it’s invaluable after we know a CEO may put the corporate earlier than their very own curiosity. And we predict it makes an enormous distinction. These are the sorts of items of information that we’re always on the market attempting to reap and arrange, to your level.
Meb: I think about loads of the listeners are listening to this and attempting to conceptualize of their heads and saying, “Okay, properly, it appears difficult to have the ability to bucket folks into good, unhealthy, or a spectrum.” So, inform us a little bit bit about…and this could possibly be the historic knowledge versus thought, however the idea, let’s get a little bit extra concrete on, like, what’s really going into how the sausage will get made about, is that this a character-driven CEO or not?
Dan: What we’re utilizing at present… I got here again to this final two years. And one of many fascinating issues that motivated me have been the next. One, it felt like character wanted to be firmed on the planet, which means that it mattered. And there wasn’t loads of locations the place you can form of categorical your worth for it. Two, I went and did some again assessments on our earlier funding method. It seems that that mannequin that Joe and I developed collectively 20 years in the past carried out very, very properly over the 20-year interval, which was one other working example and proof that we’re on to one thing. The opposite factor we tried to do is we attempt to analyze it from an element’s perspective as to why, and solely 30% of the outperformance was explainable by conventional elements, 70% was unexplainable, which means it didn’t have a correlation to conventional elements. So, we predict we’ve got stumbled onto a brand new, if you’ll, issue because it pertains to driver for efficiency. Then, throughout these 20 years, after I wasn’t engaged on the technique, and quick ahead to at present, I Googled, “Does anybody care about character as soon as?” And up popped this guide referred to as “Return on Character,” which is what we named our fund after. And it was a guide written by Fred Kiel printed by “Harvard Enterprise Evaluation.”
Fred carried out a seven-year examine on the impression of excessive character CEOs versus low character CEOs, and do they outperform? And his outcomes present that top character CEOs outperform low character CEOs by 5X, as measured by return on belongings. And that was one other knowledge level that simply, once more, affirmed the technique as a invaluable factor to attempt to work on. And so, what we did is I reached out to KRW, which is Fred’s firm. And so they lead our analysis in attempting to know the best way to analyze CEOs at present for this attribute. One in every of their companions, analysis collaborators, they’re working with these college professors that have been utilizing behavioral integrity, pure language processing to measure integrity. Now, to interrupt down character, we outline it in 4 alternative ways, or having 4 parts, integrity, duty, forgiveness, and compassion. And so, we’re always on the lookout for markers in a kind of 4 areas to have the ability to create and construct the composite character rating.
However our first display screen was utilizing behavioral integrity evaluation with the professors that KRW introduced from College of Virginia, Duke, and Yale to run our first display screen. And we ran a display screen on I believe 700 corporations, the most important 700 corporations within the Russell. And that introduced our record right down to a smaller composite. Then, our subsequent step was taking a look at publicly obtainable knowledge and scrubbing all these sources for markers of duty, forgiveness, and compassion, three different parts of character. And that was finished by three totally different folks independently, after which the composite character rating was added to the integrity rating. After which, we additionally conduct behavior-based interviews, the place we requested the road and requested folks conversant in the sector, “Inform me in regards to the CEOs within the sector that you just’re conversant in.” and we run them by the identical course of as I did earlier than. All these three inputs find yourself giving us a composite character rating, which we used to weigh the businesses that we ended up placing within the portfolio.
Meb: Perhaps this will probably be useful for listeners, you don’t have to present away the golden components or something proprietary, but it surely appears simple simply to say, “Okay, like, integrity, forgiveness, duty.” Like, what does that really imply if you’re saying form of on a quantitative stage? Like, how does that really display screen…? Most individuals, it most likely sounds subjective. You’re doing an goal lens to this.
Dan: We use CEO shareholder letters and convention name communications. And so, we’ve got over 30 years of shareholder letter evaluation on a lot of the Russell 1000 that we use to do our first display screen utilizing behavioral integrity like pure language processing.
Meb: Cool. So, give me some extra examples. Okay, so the integrity, that’s like a language display screen. On the others, are they related…? Is it language-based? Like, how do you establish for the others? What are they once more, compassion, forgiveness?
Dan: Integrity, duty, takes duty for private selections, issues like proudly owning errors after they screw up, embrace this duty, attempting to depart the world a greater place. Forgiveness, letting go of 1’s errors, letting go of others’ errors, specializing in what’s proper versus what’s unsuitable. After which compassion is empathy for others, you already know, asking for assist, empowering others, actively caring for others. And so, we run screens on Glassdoor for lots of those markers as proof rated by varied totally different workers. We go after language movies carried out with the CEOs and search for markers or examples of those three different traits. We additionally learn articles on all these varied totally different CEOs and, once more, attempting to search for these markers form of popping up and discovering proof that, “Okay, we see this right here. We see him letting go of errors or making a mistake and proudly owning it,” or a sure stage of empathy and the way in which during which they responded to COVID, for instance. All these issues start to supply factors and get factors to have the ability to give us a stage of confidence for these different three standards’s that we’re utilizing. After which the identical factor with behavior-based interviews, if you’re sitting and speaking to folks, you’re listening for these markers. After which, when these markers are hit, they get documented and added to the composite rating.
Meb: Is it extra that the constructive indicators…and it may be each side, the constructive indicators actually bubble up the very best, or is it extra just like the unfavorable ones kick folks out? So, like, I’m simply attempting to think about, like, the megalomaniac CEO that possibly, okay, on a few these, but it surely simply completely has no self-awareness with duty and blames different… How does the composite type of work?
Dan: We don’t are inclined to give attention to the negatives. I’ll inform you that the habits integrity display screen that we use, the Wirecard occasion, an instance of an enormous blowup in Germany, and this course of flagged the unfavorable there. Our orientation isn’t across the unfavorable. Usually, we simply attempt to give attention to what we name as a hyperlink rating. The decrease the hyperlink rating, the higher the outcomes because it pertains to behavioral integrity. And we aren’t screening for negatives. We’re simply attempting to spend our time in specializing in who tends to lean this path greater than others. And the opposite factor too is, like, we’re not going to get it proper 100% of the time, however we’re diversified over 106 totally different corporations and all sectors, mark cap-weighted. And we simply suppose that this can outperform over time greater than it gained’t.
Meb: There’s two elements of this that I’d like to the touch on. One is that you just really did advantageous, and you’ll converse to it, like what the unfold was. As a result of, like, loads of the dialogue about…to not lump you in ESG, however ESG type of umbrella, “Look, hey, we could or could not outperform.” However this can be a higher approach simply to get you S&P publicity. Your state of affairs, you’re not solely saying, “Hey, look, let’s make investments with these people who find themselves higher stewards,” but additionally, this may occasionally really outperform. Is that type of a part of the argument? And in that case, discuss to us a little bit bit in regards to the quantitative research or analysis, how to consider that.
Dan: No, our rivalry is that even in case you don’t consider in character, we predict this can be a good funding technique as a result of the analysis actually factors to it. You take a look at Fred Kiel’s guide, “Return on Character,” I imply, “Harvard Enterprise Evaluation,” you take a look at that and all of the proof is there. You take a look at Collins’ guide and he cites the extent 5 leaders. There’s all these totally different analysis markers. I imply, there’s quite a few research on humility that’s come out that has an enormous impact on management and its consequence in the way in which corporations carry out. After which, I’ve my very own expertise, the place I really ran this technique earlier than, through the time we have been invested for 4 years and we constantly outperformed the market. After which, we went again into the analysis on what it could have finished if we saved it going. And that very same outperformance continued for 20 years.
And so, you already know higher than anyone, previous efficiency isn’t a prediction of future efficiency. However we predict that there’s actually one thing there on simply the efficiency aspect. One other factor too, research have proven that 70% of an organization’s efficiency is a mix of market situations and enterprise mannequin. Enterprise fashions for giant corporations just like the Russell 1000, they’re all fairly related as you go sector to sector. The most important alternative for change in an organization good and unhealthy actually turns into the 30%, and that’s administration and management. And management is one thing that we predict is instantly correlated to habits. And it issues particularly… Have you ever ever labored for somebody that was a nasty boss?
Meb: Yeah, properly, let’s not name out any on the podcast particularly by identify. I’m saying I’ve been my very own boss for many of my profession. So, technically, sure, I’ve labored for myself. However, look, I’ve definitely labored with companion who had tough work experiences. Sure. And I’m positive everybody listening can say sure.
Dan: You already know, the distinction and the way it makes you’re feeling. You’re both leaving the day feeling constructive about life and hopeful realizing anyone’s acquired your again, or somebody’s attempting to go after you and also you don’t belief them. And that has an enormous impact on the way in which you work together along with your colleagues at work. It has an impact on the way in which you drive your automotive house and if you greet your youngsters if you get house. And we simply suppose that there’s loads of argument for why that is an economically rational method. However we additionally suppose its consequential impression is equally invaluable within the sense that if we’re, as a market, as traders, attempting to allocate our capital into corporations which might be champion or not less than working in the direction of this type of habits, that makes one other massive distinction too. And if we may one way or the other begin to sway the way in which folks think about how they rent CEOs and leaders, as a result of we’ve been capable of present that this really issues after which really outperforms over time, that might be a terrific byproduct of the outperformance that we hope to have the ability to present.
Meb: The composite rating, how does this really work? So, do you guys have like a 0 to 100 composite rating and also you’re actually on the lookout for the highest quintile, or quartile, or one thing?
Dan: The tails of the bell curve, on the finish of the day, we solely have 106 corporations. It’s not like we’ve got 500.
Meb: And what’s the universe?
Dan: Russell 1000. We solely acquired knowledge on roughly 700 corporations. And we’re staying form of within the bigger universe as a result of we actually need this to be a strategy to get market publicity. We now have a barely decrease beta than the market. What’s fascinating too is that Fred’s analysis, “Return on Character,” confirmed that high-character CEOs’ corporations tended to have a better return on fairness and decrease debt ratios. We went and carried out our evaluation on our present portfolio. Our corporations have the identical form of leaning as properly, decrease debt, greater return on fairness. We haven’t been capable of unnecessarily monitor our worker engagement but by our evaluation. However that’s one other indicator that Kiel recognized as a constant facet of CEOs that are usually on the upper finish of the character curve.
Meb: And so, you guys don’t simply do CEO. Do you do the entire C-suite? Do I recall that?
Dan: That will be the aim. Generally, we will achieve some understanding of the C-suite, generally we will’t. However we’ve got to begin with the CEO. Usually, in case you have a high-character CEO, your odds of them having a really high-leaning character of C-suite is much better. And one of many issues that we’ve launched, we’re actually assured in our course of however our hope is to be the very best within the area at understanding this one sliver of the market over the course of our existence. And so, we’re simply always on the lookout for methods to be higher. And moving into the C-suite at a deep stage could be a long-term goal, for positive.
Meb: Speak to me about how usually are you taking a look at this? Is it continuous? Is it yearly? How does it get examined?
Dan: We stability, if wanted, each quarter. After which we’re always watching our CEOs and our corporations. One of many issues that it’s vital to make a distinction right here is that we don’t see character as one thing meaning errors gained’t be made. Actually, we frequently see when folks screw up, like after I screw up or anyone, it’s like the final word take a look at to have a look at character. Once we’re reviewing all our CEOs, we’re always on the lookout for how they react to the challenges, what’s it that they do after they do screw up? Do they personal it or not? An important instance of that, after I first did this fund, I acquired to know Jim Sinegal of Costco as a result of he popped up on the record. He was one in all our early CEOs. And he since final day turned it over to Craig, the present CEO, and Jim was telling me a narrative about Craig and the way quickly after Jim had left, that they had a state of affairs the place that they had these little indicators of their jewellery containers at Costco. Have you ever ever been to Costco?
Meb: Yeah, but it surely’s been some time, so I don’t… What’s a jewellery field?
Dan: A jewellery field is the place they promote their diamond rings and every thing else, and watches, and issues like that. And so they had an indication that stated, “Diamonds reduce like Tiffany diamonds.” And Jim had expressed some fear about it. However ultimately, anyone forgot to place reduce like and simply put Tiffany diamonds within the case. And positive sufficient, Tiffany is available in. It’s form of upset. And so they lawyer up and Costco lawyer stated to lawyer up. And Craig form of steps in and says, “Wait a minute, we screwed up. We have to personal this. We don’t have to deny it. We have to personal our mistake and make it proper.” To me, that’s an incredible instance of character that bleeds into, not solely his however the firm’s fame. And I believe you see it performed out in that firm even at present. These sorts of issues matter.
Meb: So, a few questions. You talked about CEO transition. So, what do you do? Do you simply need to, like, restart the rankings throughout? What occurs in that state of affairs the place you’ve acquired is it a subjective transition? Have been you want, “Okay, this gal appears to be like fairly first rate too?” How do you deal with that, which I assume occurs not too occasionally?
Dan: Yeah, no, we exit the place anytime a CEO leaves. We now have to run a brand new evaluation on that, which takes a while, a part of one in all our situations.
Meb: How do you deal with one thing factor like, “Okay, we acquired a highly-rated CEO,” after which they do one thing that might knock their rating down. So, I don’t know, simply 2022, they get cancelled for doing X, which was a nasty habits, no matter it could that might journey your sign. Is it like a right away, or do you then need to, like, apply a lens and say, “Okay, we have to look at this as a result of possibly it’s not what we predict?” How does that play into the portfolio from that time?
Dan: We’d positively have to look at the state of affairs to essentially perceive precisely what the journey up was. However that might be finished fairly rapidly. And it wouldn’t be finished essentially utilizing analytics. We’d use our personal private judgment on the state of affairs, and whether or not or not we wanted to drag that CEO from the portfolio.
Meb: What may be useful is to possibly undergo both some good ones and provides some examples and/or some who’s lacking and provides some examples. I believe that may give us a little bit extra concrete, real-world feels about what these guys and gals are doing. Warren and Charlie in there? They acquired to be good behaviors, proper? The place do they rank?
Dan: Yeah, they’ve made it. Perhaps, yeah.
Meb: Okay, as you say, you already know, possibly they’re peddling an excessive amount of sugary drinks, and that…
Dan: That’s proper.
Meb: …takes them down on the…
Dan: Sees sweet, yeah, it’s simply an excessive amount of. Yeah, we don’t have loads of corporations which might be very controversial, mockingly. I imply, I believe our most controversial firm is a taser firm.
Meb: That’s query is how usually…? As a result of I think about folks listening, like, you’re not really making use of the 4 standards to the precise working enterprise, or is there some type of spillover impact?
Dan: We’re probably not taking an ethical filter on the precise business enterprise. That’s one other stage. And it will get messy fairly fast, so far as everyone has totally different opinions. And so, we attempt to keep impartial there. Some real-life examples, I imply, there’s some previous ones which might be nice, Herb Kelleher at Southwest, Jim Sinegal of Costco. We had Claiborne Deming at Murphy Oil. So far, one of many issues that’s a component of our course of is that we don’t essentially dig into loads of particular tales on the CEO after we actually attempt to depend on our course of. The brand new CEO, or it’s not too new, of Microsoft has simply popped up so far as simply remodeling the tradition of that firm. UiPath’s CEO, Dan, was a very fascinating man. Their main precept is humility as an organization, which I believed was actually fascinating so far as simply an antidote of a kind of firm that we’ve got in our portfolio.
However we’re always on the lookout for extra inputs and understandings of present corporations on the market within the market. And it’s enjoyable to be taught. I imply, it’s so enjoyable on the lookout for one thing good versus on the lookout for one thing unhealthy. And it truly is thrilling when you’ll be able to begin seeing a pattern in a selected firm and perceive that, man, these are folks actually working attempting to do higher. Nicely, we will discuss in regards to the unhealthy. That’s advantageous. Man, by the way in which, Kelleher, I used to have a quote of his hanging in my rest room. And I’m going to muck it up. However it stated one thing alongside the strains of, “We now have a strategic plan. It’s referred to as doing issues,” or one thing like that, proper? Like, it’s such a Kelleher quote. It’s so correct. Let’s discuss a couple of names. You can provide me their score or in the event that they fall in or out. Elon, the place’s Elon as a CEO?
Dan: I have a tendency to have a look at the Elons of the world as productive narcissists, ones that you just wouldn’t essentially guess towards as a result of in loads of methods, these guys are the corporate. So, they’d all the time put the corporate earlier than their very own curiosity. He didn’t make our record, however we don’t prefer to go unfavorable however we additionally don’t like to speak about our record as being form of a strategy to make different folks look unhealthy. We additionally don’t see character as a set factor. We predict it may be developed. Elon could be on the record. In a approach, I’m cheering for all 1,000 corporations and the remaining emigrate this path. There are particular CEOs that aren’t on the record for apparent causes. However I believe we additionally know why the other of what we’re attempting to determine is tremendous harmful. We wish to affirm the great aspect of the bell curve. We wish to discover the few which might be over right here. And the few which might be over right here, we simply wish to keep away from. And I believe most individuals ought to wish to keep away from them. However we’re not within the enterprise actually, Meb, of figuring out them. It’s simply not our area.
Meb: No, it is smart. By the way in which, you guys, listeners, Dan has launched an ETF, the ROCI ETF, nice ticker, with our superb associates at Alpha Architect Western crew, proper? When did you guys launch?
Dan: March twenty fourth.
Meb: Latest.
Dan: Yeah, so we’re simply out of the gate.
Meb: Simply out of the gate, that’s thrilling. I can keep in mind that identical to yesterday, our first fund.
Dan: When did you launch your first fund, Meb?
Meb: 2013. We sub-advised one in post-financial disaster, sooner than 2013. Perhaps like 2010, if I can keep in mind. So, inform us a little bit bit the way you do that in follow, so, what number of names, how do they get weighted, when do they get rebounds, all that great things.
Dan: We now have 106 names. It’s marked midway throughout all sectors. We’re actually taking the top-weighted CEOs from our standards or our evaluation for every sector. We would like the technique to any outperformance that we carry out to be actually attributed to character versus any elements that could be driving it. And so, equal-weighted the market cap perspective. We rebalance as wanted each quarter. And we’re always monitoring and reviewing our record all year long, and in addition always on the lookout for new CEOs as we go. Analysis is continually in course of. And it’s designed, Meb, to be form of a strategy to get market publicity, however solely allocate your cash to management and corporations which might be pursuing this type of habits. As a substitute of placing your cash on the broader market, that on character, or put money into character, we predict you’ll carry out over time. And in addition, it’s affirming one thing that I believe makes the world a little bit higher. And that’s form of the worth proposition as a result of we’re attempting to, in a approach, nearly create a personality market.
Meb: What has been the preliminary reception for the way individuals are form of receiving it? And what I imply by that’s not essentially are simply folks dumping hundreds of thousands of {dollars} into it however loads of occasions, after we’ll launch a product or an thought, we’ll get some responses that we didn’t anticipate, or folks say, “Oh, fascinating,” and never essentially in a unfavorable but additionally in a constructive approach. Or possibly they are saying this matches in otherwise or one thing. Like, what’s form of been among the conversations you’re having and the way are folks fascinated with this right here in 2022?
Dan: Generally, it’s very uncommon folks don’t prefer it. It’s like this appeals to one thing nearly innate, and those that goes…it’s nearly like a duh. In fact, that is smart. And the common investor will say folks which might be within the business completely adore it. They have an inclination to all the time ask, “How can I purchase?” And it’s a must to clarify it to your advisor and allocate parts of your present portfolio to [inaudible 00:32:34.364]. The subtle traders are always taking a look at it in comparison with every thing else that they do. And I believe all of them just like the premise. They wish to see a monitor file over time, as most individuals would. However there’s an actual broad and basic openness to it I’ve discovered to this point. There are all the time one or two individuals who suppose that character doesn’t matter. They cite different corporations the place our CEOs have outperformed, have finished very well, and so they don’t have character. And so, that’s all the time simple to do. However, generally, it’s been very properly obtained. And the principle factor is simply getting the phrase out that there’s now some first time. I keep in mind the primary behavior-based funding product I believe the SEC has ever accredited. And it’s a form of a brand new different. We don’t fairly know the place we match but within the SG world, however we definitely suppose it’s related, and we’re hoping that individuals additionally care about investing in character and see us as a approach to try this.
Meb: You have got a pleasant web site that you just’re constructing out, and I used to be smiling as a result of it talks in regards to the issues that do matter, the issues that don’t matter, age, tenure, business, schooling, profession path, political stance, beliefs, faith, and household historical past, which I believed was nice.
Dan: It’s all research-based evaluation. The opposite fascinating factor is that the 4 traits discovered that we outline this character, integrity, duty, forgiveness, and compassion are additionally the traits in different cultures which might be attributed to the definition of character. And so, this isn’t simply, say, an American factor. Most societies would acknowledge that these 4 areas introduced collectively Is form of a illustration of character. So, we might like to sometime take this past America and go to Europe and Asian markets.
Meb: Presumably, it ought to apply, no?
Dan: Sure.
Meb: I’m wondering how a lot cultural distinction you see in a few of these international locations. I imply, not solely may you globally, however you’ll basically find yourself with some nation cultural ranks, I’d assume, the place some international locations, simply by the way in which that individuals are wired socially, that they might have decrease weights on a few of these.
Dan: See, that’s the factor that’s fascinating is the analysis exhibits that telling the reality is linked to integrity, taking obligations for if you screw up is linked to duty, forgiveness, forgiving different folks after they screw up, compassion, empathy for others. Anytime these 4 traits form of mix does typically outline, properly, that particular person’s acquired character. I’ve talked to Fred Kiel about this. And he says, “Yeah, it’s nearly like this common rule that form of runs by us all.” These issues matter because it pertains to the way you outline character. Like I stated, the opposite issues the place you stated doesn’t have something to do along with your habits kind, your persona kind, for instance, you’re introvert otherwise you’re extrovert, it doesn’t matter. It may come up in any form of human being.
Meb: It’s fascinating as a result of there are loads of extra avenues this might go together with totally different subsets of the globe. As you consider experiencing and refining the analysis within the coming horizon as you look out, what are some areas the place you’re form of like scratching your head or pondering within the Redding woods, the place you’re like, “I’m wondering if we may incorporate X?” or, “I’m curious if these measures could correlate to Y?” like, what are y’all fascinated with as you look out to the long run?
Dan: Once I look out to the long run, I actually return to analysis and the way we could be higher at understanding this facet of the market. I can’t assist however suppose in case you go on Amazon and also you take a look at this pen, for instance, they’ll have like 20 critiques on this pen. Individuals take the time to put in writing their opinions. A dream of mine could be to have the ability to present a strategy to begin to present a voice to folks which might be working within the trenches and to have the ability to begin offering perspective on the way in which management behaves and culminating that knowledge and utilizing it as an informative strategy to allocate investments. That’s one thing that I take into consideration lots and the way finest to try this as a result of I believe there’s lots of people which have lots to say about how they’re handled or their experiences at work. And it’s so private and related that it’d be nice to determine the best way to form of unlock that in a extra deep and sustainable method.
Meb: Yeah, how does the Glassdoor impact, something like that ever play into it? The place you, like, “Look, the CEO says all the correct issues however behind the scenes, this man is a complete tyrant.” Is that one thing that ever surfaces otherwise you ever, like, take into consideration, you already know, on the similar time, the Glassdoor is completely unreliable as a result of it could possibly be a bunch of workers that simply acquired fired?
Dan: Proper. I had one state of affairs the place I simply referred to as Christian leaders and stated, “Hey, this CEO is simply unbelievable. He’s acquired an unbelievable character.” However then all my evaluation on the CEO exhibits that he was extra like the overall and some good males that put the worry of God in all subordinates. And so, you rapidly realized that the way in which these folks behave, CEOs behave on the golf membership isn’t indicative of how they behave within the trenches. And so, the extra that we will refine our evaluation utilizing quite a lot of totally different instruments, Glassdoor critiques are nice as a degree of consideration, not the purpose of consideration, the higher we’ll be at understanding. There’s loads of instruments which might be obtainable at present that haven’t been up to now that may assist us achieve each an understanding of this facet of corporations, not simply from the standpoint of, say, pure language processing, synthetic intelligence of habits, of language, but additionally simply folks’s capacity to freely categorical data. And people are all issues that I believe and hope that we will develop over time and actually enhance upon and make us smarter. And in addition, it’ll be form of enjoyable is that it begins to indicate in impact. CEOs really suppose twice earlier than they behave poorly as a result of habits begins to matter. That will be a neat byproduct.
Meb: Yeah, you simply begin publishing your record. That’s like the true get the CEOs to begin behaving, publicly shaming them and saying, “Look, man, you’re backside quartile proper now. You bought to choose it up.” There’s a aspect enterprise for you, promoting entry to the record of all the general public boards across the nation and being like, “Yo, you guys, your CEO is considering up the joint. Perhaps it’s best to take into consideration one thing else.” That will be an fascinating, activist marketing campaign state of affairs. You’re going to get… Elliott, in case you’re listening to this podcast, Carl Icahn, in case you’re listening, right here’s your targets proper right here.
Dan: It could be an actual consciousness if the boards are asking the query, “Why isn’t my CEO on the record?” And if we will get that a lot traction, and we will display… Most individuals have a core a part of their funding technique that sits within the markets on a broad stage, just like the Russell 1000 or the S&P 500, our worth proposition, our request out there is transfer proportion of that over to the character fund, VOC ETF, and get form of the identical relative threat returns with the upside of character over time. The extra we will get folks investing in character and displaying that that issues, that they do care about habits, and that, in a approach, it’s form of a vote that they consider it should outperform, the extra consideration we’ll get, I believe, with these corporations, with these board of administrators. That’s the long-term aim. We’re orienting ourselves in the direction of attempting to construct a method that will probably be right here for 100 years. We don’t wish to promote it. I’ve acquired an unbelievable investor in Bridgeway Capital Administration, which is out of Houston, John Montgomery, and Tamra, the CEO there, our principal traders. And we’re targeted on attempting to create a product that’s obtainable for so long as folks care about character out there, there may be the place to affirm it. That’s our focus. And we’re actually excited. I imply, we’re simply getting began, Meb. And absolutely, I actually do recognize you having us on.
Meb: Oh, it’s enjoyable. John is a former podcast alum, listeners, episode 323, if you wish to try a enjoyable chat. He’s one of many OGs of quantitative investing, as I discussed to him within the present, even owned his fund at one level many moons in the past.
Dan: John was the one which did our backtest evaluate of our earlier portfolio and his head form of fell off his shoulders after they noticed and found this type of what we name the character issue. That authentic efficiency isn’t associated to our fund at present, however my authentic technique, solely 30% of the outperformance was associated to elements, 70% John couldn’t clarify. And so, he acquired fairly excited.
Meb: If anyone is aware of extra about elements in testing, John is likely one of the few. As we begin to wind down, Dan, what else? Something we missed within the basic dialog about character-based investing, or like, “Yo, Meb, we should always have talked about X, Y, Z,” or we’d lined all? What else is in there?
Dan: Nicely, I imply, you already know, from my standpoint, I’m actually targeted on attempting to persuade folks to place 20%, 30% of their market publicity in ROC ETF. It’s an enormous piece however we’re simply getting going. We’re seeking to construct a group of those that suppose character issues. We’re calling it ROC Ambassadors. The fund is connecting with different traders that suppose it issues and wish to affirm it. So, we’re all the time on the lookout for folks,
Meb: How are you going to attach these? You guys are going to construct out a Slack channel, or is there going to be a approach you’re going to carry the ROC convention sooner or later? What’s a great way for these guys to attach ultimately? You’re nonetheless brainstorming.
Dan: We’re nonetheless brainstorming. We’re a month out. We’d like to have a ROC convention, a Slack connection level. We’re on the lookout for ambassadors. Meb, would you be a ROC ambassador for us?
Meb: You bought to ship me some swag, and not less than one free fishing lesson in Northern California.
Dan: Completely, and a waterfall go to. Yeah, I believe you’d like that one too.
Meb: Cool. I’m going to hit you for the [inaudible 00:42:45.234] stuff. Nicely, yeah, I imply, it’s fascinating. I really like the concept and the idea. It’s one of many ideas that additionally, like, you wish to consider in, the place you’re, like, hopeful that that is the way in which it really works and never the other. The nice guys win, guys and gals. So, that’s fairly cool. What’s been your most memorable funding, wanting again over time? You’ve finished lots, been in loads of locations. Something that seared into your mind?
Dan: Nicely, I believe my most memorable funding has been my authentic funding character fund that was capable of outperform for 20 years by investing in CEOs that had tendency to behave with character and honor. I had the privilege of attending to know plenty of these CEOs. And the neat factor about that’s that all of them are inclined to make you higher as an individual. And it’s not too usually that you could be within the funding world and really turn out to be higher as a consequence of your focus. On this case, that was most likely my best guess. And the best consequence is having the ability to form of show that it does matter, you already know, and it really works. That’s what I’d maintain up for example.
Meb: All proper, properly, listeners, all my public firm CEOs, in case you’re not on their holdings record, you bought to succeed in out to Dan and say, “What’s occurring, man? There’s one other line of enterprise… I have to amp up my quantity. The place am I going unsuitable right here?”
Dan: Meb, I believe it’s vital to say, and this can be a actually cool facet of this, is that Fred, he launched a consulting firm that really goes in… It’s referred to as KRW Worldwide. And so they go into enormous corporations and assist corporations develop this facet. And their rivalry is it’s not that individuals have or don’t have character, it’s the way you develop it over time. And so KRW, in case you’re not on the record, really is the answer to this aspect of the coin. We’re solely seeking to attempt to determine KRW Worldwide after which those I labored with on the analysis entrance can present an answer to get corporations form of wanting and orienting on this path. It’s actually thrilling.
Meb: Superior. Nicely, look, man, the place do folks discover out in the event that they wish to try the fund, what you guys are as much as? What’s the very best place?
Dan: Rocinvestments.com, www.rocinvestments.com is the place we reside. And you can even discover me on LinkedIn. I welcome folks reaching out, giving me their opinion on totally different corporations or concepts. The extra we will rally collectively… If ever there was a group method to investing, it’s this as a result of all of us and many people reside with these CEOs or reside and work in these corporations are conversant in them from knowledgeable standpoint, we welcome the dialogue. I sit up for listening to from folks.
Meb: Superior, man. Dan, it’s been a blast. Thanks a lot for becoming a member of us at present.
Dan: Yeah, it was an honor. I actually recognize it.
Meb: Podcast listeners, we’ll put up present notes to at present’s dialog at mebfaber.com/podcast. If you happen to love the present, in case you hate it, shoot us suggestions at [email protected]. We like to learn the critiques. Please evaluate us on iTunes and subscribe to the present, anyplace good podcasts are discovered. Thanks for listening, associates, and good investing.
