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 idea 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 technique centered 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 components solely defined 30% of the technique’s outperformance, he determined to launch an ETF primarily based 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 centered on character
- 8:51 – The unique idea of creating a guidelines primarily based 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 typically 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 listing incentivize higher conduct 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 – Be taught extra about Dan Cooper; rocinvestments.com; LinkedIn
Transcript of Episode 420:
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Meb: Welcome podcast listeners, we now have a very enjoyable present for you right now. Our visitor is Dan Cooper, founder and CEO of ROC Investments, which allocates capital on the idea of the behaviors of the CEOs and their senior government groups. Dan shares how he ran a technique centered 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 components solely defined 30% of the technique’s outperformance, he determined to launch an ETF primarily based 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 after upon a time.
Dan: You probably did?
Meb: I did.
Dan: Yeah, I did it too. It’s definitely worth the hike. It’s received an amazing view, supplied there’s not smoke within the space. And we’re getting a whole lot 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’ve two boys, and we love clear mountain streams, and rivers, and lakes, and mountain mountain climbing, 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 at some point.
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 films, slept in my automobile, awakened, and began strolling in the course of the night time. And listeners, should you’ve by no means been mountain climbing 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 religious, 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 bear in mind sliding down with my axe, my ice axe, and sitting on my backpack to go down manner quicker as a result of I used to be exhausted at that time. I bear in mind very particularly attending to a pace the place I assumed, what? There’s no turning again, however I’m going manner too quick. And should you’ve ever seen these movies on TV the place folks’s just like the ice axe via 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 once you’re by your self. We received about halfway up the mountain and the solar began developing and the shadow of the mountain fell on the clouds beneath. 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 somewhat bit about your background. You bought a enjoyable origin story. You spend a while on another nations and continents. Give us the timeline origin story for Dan.
Dan: Yeah, man. I began off fairly humble, nonetheless am fairly humble, labored my manner via school operating my poison ivy killing enterprise in Boston the place my dad and mom reside. I used to be referred to as Dan, the poison ivy man. Everyone had it, no one wished it, and I used to be the one one silly sufficient to go eliminate it. So, once I graduated from school, that’s all I actually knew the way to do. However a man named Joe Ritchie grabbed me out of school. Joe Ritchie based a fairly well-known buying and selling firm, which was known as Chicago Analysis and Buying and selling, CRT. And so they had been the most important choices and futures agency on the earth again then. And so they traded I feel one thing like ridiculous quantities within the quantity of complete market. I joined him after he had offered to Financial institution of America. We had been managing his personal cash. We all the time had quant fashions going that Joe was creating. We’re allocating capital via personal fairness and venture-type methods everywhere in 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 had 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 manner that was simply unbelievable. The opposite factor I did with Joe’s after 9/11, I used to be bored with overseas diplomacy and politics. I launched the primary character fund. That’s primarily based on what I’m doing right now.
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 nice ones had been, who the CEOs that really have character as a result of I feel 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 mentioned, “It’s going to be tough to investigate Wall Avenue and each side of taking the recognized knowledge swimming pools and reduce them in numerous methods.” However I feel we may very well be higher than the market at understanding this one section of the market, which is character. And on the time, I used to be studying Collins’ ebook, “Good to Nice.” After which, I used to be additionally attempting to convey an organization to Japan known as Tal Plus [SP] out in Nebraska. And so they develop behavior-based interview programs to quantify the diploma by which an individual suits a job utilizing an interview course of. And so, I put two and two collectively and used Collins’ findings round degree 5 leaders as the factors. And so they constructed a behavior-based interview round that and began speaking to all people on the road, analysts. We scored the CEO purely on the idea 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 foul man listing and particular person listing. And we went quick. The unhealthy CEOs, alongside the nice ones shortly realized that the shorts form of had been consuming our shorts, actually killing us, as a result of they had been one of the 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, typically, for some motive, gave the impression to be positioned 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 definately’re like, “Okay, that was completely atrocious. I’d by no means put money into that particular person once more.” However then they only kind of, like, resurface, like, a yr or two later some other place.
Dan: Similar factor in politics. I imply, it’s superb how the market forgives. So, we received 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 received 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 complete wanker. This man is clearly a liar. This man is operating this for his personal private profit,” no matter, on and on and on, or the place you, like, 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, the easiest way to get to this understanding, the holy grail of this strategy is knowing folks which can 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 assume would possibly 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 motive.” That knowledge and that info relayed would then form of be markers that we might be capable to use in our grading scorecard for every dialog and every bit of information that we discovered that was related to the knowledge we’re in search of. Every CEO had a unique 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 feel 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, a whole lot of the issues that the road form of throws out on the ground doesn’t know the way to worth. And we predict it’s priceless after we know a CEO would possibly 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 continually on the market attempting to reap and manage, to your level.
Meb: I think about a whole lot 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 somewhat bit about…and this may very well be the historic knowledge versus thought, however the idea, let’s get somewhat 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 right now… I got here again to this final two years. And one of many fascinating issues that motivated me had been the next. One, it felt like character wanted to be firmed on the earth, which means that it mattered. And there wasn’t a whole lot of locations the place you may form of categorical your worth for it. Two, I went and did some again exams on our earlier funding strategy. 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 components, 70% was unexplainable, which means it didn’t have a correlation to conventional components. So, we predict we now have stumbled onto a brand new, if you’ll, issue because it pertains to driver for efficiency. Then, throughout these 20 years, once I wasn’t engaged on the technique, and quick ahead to right now, I Googled, “Does anybody care about character as soon as?” And up popped this ebook known as “Return on Character,” which is what we named our fund after. And it was a ebook written by Fred Kiel revealed by “Harvard Enterprise Overview.”
Fred carried out a seven-year examine on the influence of excessive character CEOs versus low character CEOs, and do they outperform? And his outcomes present that prime character CEOs outperform low character CEOs by 5X, as measured by return on property. And that was one other knowledge level that simply, once more, affirmed the technique as a priceless 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 grasp the way to analyze CEOs right now for this attribute. One in all their companions, analysis collaborators, they’re working with these college professors that had been utilizing behavioral integrity, pure language processing to measure integrity. Now, to interrupt down character, we outline it in 4 other ways, or having 4 parts, integrity, duty, forgiveness, and compassion. And so, we’re continually in search of 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 feel 700 corporations, the most important 700 corporations within the Russell. And that introduced our listing all the way down to a smaller composite. Then, our subsequent step was publicly out there knowledge and scrubbing all these sources for markers of duty, forgiveness, and compassion, three different parts of character. And that was executed by three completely 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 aware of the sector, “Inform me concerning the CEOs within the sector that you just’re aware of.” and we run them via 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 shall be useful for listeners, you don’t have to provide away the golden system or something proprietary, but it surely appears simple simply to say, “Okay, like, integrity, forgiveness, duty.” Like, what does that really imply once you’re saying form of on a quantitative degree? 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 now have over 30 years of shareholder letter evaluation on many 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 identify 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 incorrect. After which compassion is empathy for others, , 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 numerous completely 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 numerous completely 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 degree of empathy and the way in which by which they responded to COVID, for instance. All these issues start to offer factors and get factors to have the ability to give us a degree of confidence for these different three standards’s that we’re utilizing. After which the identical factor with behavior-based interviews, once 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 optimistic alerts…and it may be each side, the optimistic alerts actually bubble up one of the best, or is it extra just like the unfavourable 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 kind of work?
Dan: We don’t are likely to concentrate on the negatives. I’ll let you know that the conduct integrity display screen that we use, the Wirecard occasion, an instance of an enormous blowup in Germany, and this course of flagged the unfavourable there. Our orientation isn’t across the unfavourable. Usually, we simply attempt to concentrate on 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 course 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 completely different corporations and all sectors, mark cap-weighted. And we simply assume that it will 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 tremendous, and you’ll converse to it, like what the unfold was. As a result of, like, a whole lot of the dialogue about…to not lump you in ESG, however ESG kind of umbrella, “Look, hey, we might or might not outperform.” However this can be a higher manner simply to get you S&P publicity. Your situation, you’re not solely saying, “Hey, look, let’s make investments with these people who find themselves higher stewards,” but additionally, this will really outperform. Is that kind of a part of the argument? And if that’s the case, speak to us somewhat bit concerning the quantitative research or analysis, how to consider that.
Dan: No, our rivalry is that even should 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 have a look at Fred Kiel’s ebook, “Return on Character,” I imply, “Harvard Enterprise Overview,” you have a look at that and all of the proof is there. You have a look at Collins’ ebook and he cites the extent 5 leaders. There’s all these completely 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 had been invested for 4 years and we persistently outperformed the market. After which, we went again into the analysis on what it could have executed if we stored it going. And that very same outperformance continued for 20 years.
And so, 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 facet. 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 conduct. And it issues particularly… Have you ever ever labored for somebody that was a foul 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 accomplice who had tough work experiences. Sure. And I’m certain everybody listening can say sure.
Dan: , the distinction and the way it makes you are feeling. You’re both leaving the day feeling optimistic about life and hopeful figuring out anyone’s received 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 together with your colleagues at work. It has an impact on the way in which you drive your automobile house and once you greet your youngsters once you get house. And we simply assume that there’s a whole lot of argument for why that is an economically rational strategy. However we additionally assume its consequential influence is equally priceless within the sense that if we’re, as a market, as buyers, attempting to allocate our capital into corporations which can be champion or at the very least working in direction of this sort of conduct, that makes one other huge 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 in a position to present that this really issues after which really outperforms over time, that might be an amazing 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 in search of 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 now have 500.
Meb: And what’s the universe?
Dan: Russell 1000. We solely received 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 solution to get market publicity. We’ve 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 the next 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, increased return on fairness. We haven’t been in a position to unnecessarily observe our worker engagement but via our evaluation. However that’s one other indicator that Kiel recognized as a constant side of CEOs that are typically 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 objective. Generally, we will achieve some understanding of the C-suite, typically we will’t. However we now have to start out with the CEO. Usually, when you have a high-character CEO, your odds of them having a really high-leaning character of C-suite is way higher. And one of many issues that we’ve launched, we’re actually assured in our course of however our hope is to be one of the best within the area at understanding this one sliver of the market over the course of our existence. And so, we’re simply continually in search of methods to be higher. And entering into the C-suite at a deep degree could be a long-term goal, for certain.
Meb: Discuss to me about how typically are you this? Is it continuous? Is it yearly? How does it get examined?
Dan: We stability, if wanted, each quarter. After which we’re continually 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. In truth, we regularly see when folks screw up, like once I screw up or anyone, it’s like the last word take a look at to have a look at character. After we’re reviewing all our CEOs, we’re continually in search of 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, once I first did this fund, I received to know Jim Sinegal of Costco as a result of he popped up on the listing. He was considered one of 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, they’d a situation the place they’d 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 mentioned, “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 certain sufficient, Tiffany is available in. It’s form of upset. And so they lawyer up and Costco lawyer mentioned 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 must deny it. We have to personal our mistake and make it proper.” To me, that’s a tremendous instance of character that bleeds into, not solely his however the firm’s popularity. And I feel you see it performed out in that firm even right now. These sorts of issues matter.
Meb: So, a few questions. You talked about CEO transition. So, what do you do? Do you simply must, like, restart the rankings throughout? What occurs in that situation the place you’ve received is it a subjective transition? Had been you want, “Okay, this gal appears fairly respectable 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’ve to run a brand new evaluation on that, which takes a while, a part of considered one of our situations.
Meb: How do you deal with one thing factor like, “Okay, we received 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 foul conduct, no matter it could that might journey your sign. Is it like a right away, or do you then must, like, apply a lens and say, “Okay, we have to study 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 undoubtedly have to look at the state of affairs to actually perceive precisely what the journey up was. However that might be executed fairly shortly. And it wouldn’t be executed essentially utilizing analytics. We’d use our personal private judgment on the state of affairs, and whether or not or not we would have liked to drag that CEO from the portfolio.
Meb: What could 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 feel that may give us somewhat extra concrete, real-world feels about what these guys and gals are doing. Warren and Charlie in there? They received to be good behaviors, proper? The place do they rank?
Dan: Yeah, they’ve made it. Perhaps, yeah.
Meb: Okay, as you say, , 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 a whole lot of corporations which can be very controversial, satirically. I imply, I feel our most controversial firm is a taser firm.
Meb: That’s query is how typically…? 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 kind of spillover impact?
Dan: We’re not likely taking an ethical filter on the precise business enterprise. That’s one other degree. And it will get messy fairly fast, so far as all people has completely different opinions. And so, we attempt to keep impartial there. Some real-life examples, I imply, there’s some previous ones which can be nice, Herb Kelleher at Southwest, Jim Sinegal of Costco. We had Claiborne Deming at Murphy Oil. To this point, one of many issues that’s a component of our course of is that we don’t essentially dig into a whole lot 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 assumed was actually fascinating so far as simply an antidote of a sort of firm that we now have in our portfolio.
However we’re continually in search of extra inputs and understandings of present corporations on the market within the market. And it’s enjoyable to study. I imply, it’s so enjoyable in search of one thing good versus in search of 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. Properly, we will speak concerning the unhealthy. That’s tremendous. Man, by the way in which, Kelleher, I used to have a quote of his hanging in my toilet. And I’m going to muck it up. However it mentioned one thing alongside the traces of, “We’ve a strategic plan. It’s known as doing issues,” or one thing like that, proper? Like, it’s such a Kelleher quote. It’s so correct. Let’s discuss just a few 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 in opposition to as a result of in a whole lot 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 listing, however we don’t wish to go unfavourable however we additionally don’t like to speak about our listing as being form of a solution to make different folks look unhealthy. We additionally don’t see character as a hard and fast factor. We expect it may be developed. Elon could be on the listing. In a manner, I’m cheering for all 1,000 corporations and the remaining emigrate this course. There are particular CEOs that aren’t on the listing for apparent causes. However I feel we additionally know why the other of what we’re attempting to establish is tremendous harmful. We wish to affirm the nice facet of the bell curve. We wish to discover the few which can be over right here. And the few which can be over right here, we simply wish to steer clear of. And I feel most individuals ought to wish to steer clear of 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 mates 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 bear in mind. So, inform us somewhat 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’ve 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 components which may be driving it. And so, equal-weighted the market cap perspective. We rebalance as wanted each quarter. And we’re continually monitoring and reviewing our listing all year long, and likewise continually in search of new CEOs as we go. Analysis is consistently in course of. And it’s designed, Meb, to be form of a solution to get market publicity, however solely allocate your cash to management and corporations which can be pursuing this sort of conduct. As an alternative 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 likewise, it’s affirming one thing that I feel makes the world somewhat higher. And that’s form of the worth proposition as a result of we’re attempting to, in a manner, nearly create a personality market.
Meb: What has been the preliminary reception for the way persons are form of receiving it? And what I imply by that isn’t essentially are simply folks dumping thousands and thousands of {dollars} into it however a whole lot of instances, 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 unfavourable but additionally in a optimistic manner. Or possibly they are saying this suits in differently or one thing. Like, what’s form of been among the conversations you’re having and the way are folks occupied with this right here in 2022?
Dan: Usually, it’s very uncommon folks don’t prefer it. It’s like this appeals to one thing nearly innate, and people who goes…it’s nearly like a duh. In fact, that is smart. And the common investor will say folks which can be within the business completely adore it. They have a tendency 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 buyers are continually it in comparison with every thing else that they do. And I feel all of them just like the premise. They wish to see a observe document over time, as most individuals would. However there’s an actual broad and basic openness to it I’ve discovered up to now. There are all the time one or two individuals who assume that character doesn’t matter. They cite different corporations the place our CEOs have outperformed, have executed rather well, and so they don’t have character. And so, that’s all the time simple to do. However, usually, it’s been very properly obtained. And the principle factor is simply getting the phrase out that there’s now some first time. I bear in mind the primary behavior-based funding product I feel the SEC has ever authorised. And it’s a form of a brand new various. We don’t fairly know the place we match but within the SG world, however we definitely assume it’s related, and we’re hoping that individuals additionally care about investing in character and see us as a manner to do this.
Meb: You might have a pleasant web site that you just’re constructing out, and I used to be smiling as a result of it talks concerning 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 assumed 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 can 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 nations. I imply, not solely may you globally, however you’ll basically find yourself with some nation cultural ranks, I’d assume, the place some nations, simply by the way in which that persons are wired socially, that they could have decrease weights on a few of these.
Dan: See, that’s the factor that’s fascinating is the analysis reveals that telling the reality is linked to integrity, taking tasks for once 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 usually outline, properly, that particular person’s received character. I’ve talked to Fred Kiel about this. And he says, “Yeah, it’s nearly like this common rule that form of runs via us all.” These issues matter because it pertains to the way you outline character. Like I mentioned, the opposite issues the place you mentioned doesn’t have something to do together with your conduct kind, your character kind, for instance, you’re introvert otherwise you’re extrovert, it doesn’t matter. It will possibly come up in any form of human being.
Meb: It’s fascinating as a result of there are a whole lot of extra avenues this might go along with completely 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 might correlate to Y?” like, what are y’all occupied with as you look out to the long run?
Dan: After I look out to the long run, I actually return to analysis and the way we could be higher at understanding this side of the market. I can’t assist however assume should you go on Amazon and also you have a look at this pen, for instance, they’ll have like 20 evaluations on this pen. Folks take the time to jot down their opinions. A dream of mine could be to have the ability to present a solution to begin to present a voice to folks which can 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 solution to allocate investments. That’s one thing that I take into consideration so much and the way greatest to do this as a result of I feel there’s lots of people which have so much 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 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 appropriate 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, , on the identical time, the Glassdoor is completely unreliable as a result of it may very well be a bunch of workers that simply received fired?
Dan: Proper. I had one situation the place I simply known as Christian leaders and mentioned, “Hey, this CEO is simply unbelievable. He’s received an unbelievable character.” However then all my evaluation on the CEO reveals that he was extra like the overall and some good males that put the concern of God in all subordinates. And so, you shortly realized that the way in which these folks behave, CEOs behave on the golf membership will not be indicative of how they behave within the trenches. And so, the extra that we will refine our evaluation utilizing a wide range of completely different instruments, Glassdoor evaluations are nice as some extent of consideration, not the purpose of consideration, the higher we’ll be at understanding. There’s a whole lot of instruments which can be out there right now that haven’t been up to now that may assist us achieve each an understanding of this side of corporations, not simply from the standpoint of, say, pure language processing, synthetic intelligence of conduct, of language, but additionally simply folks’s capacity to freely categorical info. And people are all issues that I feel and hope that we will develop over time and actually enhance upon and make us smarter. And likewise, it’ll be form of enjoyable is that it begins to indicate in impact. CEOs really assume twice earlier than they behave poorly as a result of conduct begins to matter. That will be a neat byproduct.
Meb: Yeah, you simply begin publishing your listing. That’s like the true get the CEOs to start out behaving, publicly shaming them and saying, “Look, man, you’re backside quartile proper now. You bought to select it up.” There’s a facet enterprise for you, promoting entry to the listing of all the general public boards across the nation and being like, “Yo, you guys, your CEO is pondering up the joint. Perhaps it is 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, should you’re listening to this podcast, Carl Icahn, should 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 listing?” And if we will get that a lot traction, and we will exhibit… Most individuals have a core a part of their funding technique that sits within the markets on a broad degree, 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 exhibiting that that issues, that they do care about conduct, and that, in a manner, it’s form of a vote that they consider it’s going to outperform, the extra consideration we’ll get, I feel, with these corporations, with these board of administrators. That’s the long-term objective. We’re orienting ourselves in direction of attempting to construct a technique that shall be right here for 100 years. We don’t wish to promote it. I’ve received an unbelievable investor in Bridgeway Capital Administration, which is out of Houston, John Montgomery, and Tamra, the CEO there, our principal buyers. And we’re centered on attempting to create a product that’s out there for so long as folks care about character out there, there’s the place to affirm it. That’s our focus. And we’re actually excited. I imply, we’re simply getting began, Meb. And certainly, 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 take a look at 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 assessment of our earlier portfolio and his head form of fell off his shoulders after they noticed and found this sort of what we name the character issue. That unique efficiency will not be associated to our fund right now, however my unique technique, solely 30% of the outperformance was associated to components, 70% John couldn’t clarify. And so, he received fairly excited.
Meb: If anyone is aware of extra about components in testing, John is without doubt 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 coated all? What else is in there?
Dan: Properly, I imply, , from my standpoint, I’m actually centered 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 neighborhood of people who assume character issues. We’re calling it ROC Ambassadors. The fund is connecting with different buyers that assume it issues and wish to affirm it. So, we’re all the time in search of 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 manner you’re going to carry the ROC convention in some unspecified time in the future? 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 in search of ambassadors. Meb, would you be a ROC ambassador for us?
Meb: You bought to ship me some swag, and at the very least one free fishing lesson in Northern California.
Dan: Completely, and a waterfall go to. Yeah, I feel you’d like that one too.
Meb: Cool. I’m going to hit you for the [inaudible 00:42:45.234] stuff. Properly, yeah, I imply, it’s fascinating. I like the thought 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 executed so much, been in a whole lot of locations. Something that seared into your mind?
Dan: Properly, I feel my most memorable funding has been my unique funding character fund that was in a position to 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 a variety of these CEOs. And the neat factor about that’s that all of them are likely to make you higher as an individual. And it’s not too typically that you would be able to be within the funding world and truly change into higher as a consequence of your focus. On this case, that was most likely my best guess. And the best final result is with the ability to form of show that it does matter, , and it really works. That’s what I’d maintain up for instance.
Meb: All proper, properly, listeners, all my public firm CEOs, should you’re not on their holdings listing, you bought to succeed in out to Dan and say, “What’s occurring, man? There’s one other line of enterprise… I must amp up my quantity. The place am I going incorrect right here?”
Dan: Meb, I feel it’s vital to say, and this can be a actually cool side of this, is that Fred, he launched a consulting firm that really goes in… It’s known as KRW Worldwide. And so they go into enormous corporations and assist corporations develop this side. 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, should you’re not on the listing, really is the answer to this facet of the coin. We’re solely seeking to attempt to establish 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 course. It’s actually thrilling.
Meb: Superior. Properly, look, man, the place do folks discover out in the event that they wish to take a look at the fund, what you guys are as much as? What’s one of the 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 completely different corporations or concepts. The extra we will rally collectively… If ever there was a neighborhood strategy 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 aware of them from an expert standpoint, we welcome the dialogue. I look ahead to listening to from folks.
Meb: Superior, man. Dan, it’s been a blast. Thanks a lot for becoming a member of us right now.
Dan: Yeah, it was an honor. I actually recognize it.
Meb: Podcast listeners, we’ll put up present notes to right now’s dialog at mebfaber.com/podcast. For those who love the present, should you hate it, shoot us suggestions at [email protected]. We like to learn the evaluations. Please assessment us on iTunes and subscribe to the present, wherever good podcasts are discovered. Thanks for listening, mates, and good investing.
