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 govt groups.
Date Recorded: 5/11/2022 | Run-Time: 50:11
Abstract: Dan shares how he ran a method targeted on investing in firms 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 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 targeted 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 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 – 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 immediately. 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 govt groups. Dan shares how he ran a method targeted on investing in firms 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 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 when upon a time.
Dan: You probably did?
Meb: I did.
Dan: Yeah, I did it too. It’s well worth the hike. It’s obtained an incredible view, supplied there’s not smoke within the space. And we’re getting a variety of that as of late 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 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 in the future.
Dan: Oh, wow.
Meb: It was truly 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, awoke, and began strolling in the course of the night time. And listeners, in case 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. But it surely was like a full moon. And one of the vital non secular, simply memorable moments of my life was strolling. I simply finally turned off my headlamp, so that you’re simply strolling in the dead of night and this path. And finally, you come out of the forest and also you see Shasta with simply stars behind it. And I used to be similar 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 velocity the place I believed, you recognize what? There’s no turning again, however I’m going manner 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 awoke early similar to you guys, otherwise you did if you’re by your self. We obtained 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 a 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 manner by school 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. Everyone had it, no one needed 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 right way to do. However a man named Joe Ritchie grabbed me out of school. Joe Ritchie based a reasonably well-known buying and selling firm, which was known as Chicago Analysis and Buying and selling, CRT. And so they have been the biggest choices and futures agency on the earth 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 non-public fairness and venture-type methods everywhere in the world.
However we additionally did these loopy international 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 making an attempt 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 sort 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 international diplomacy and politics. I launched the primary character fund. That’s primarily based on what I’m doing immediately.
Meb: What’s the 12 months 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 have been, who the CEOs that really have character as a result of I believe that’d be an unimaginable 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 tough to research Wall Road and each facet of taking the identified information swimming pools and lower them in numerous methods.” However I believe we might 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’ e-book, “Good to Nice.” After which, I used to be additionally making an attempt to carry an organization to Japan known as Tal Plus [SP] out in Nebraska. And so they develop behavior-based interview techniques 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 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 idea of this one standards after which allotted capital.
Initially, we went quick. We additionally sort of surveyed for the dangerous guys. And we had a foul man record and an excellent particular person record. And we went quick. The dangerous CEOs, alongside the nice ones rapidly realized that the shorts sort 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 comply with a number of the actual dangerous, which, surprisingly, usually, for some purpose, gave the impression to be situated in Salt Lake Metropolis, Vancouver, another locales. However they proceed to have 9 lives, which is sort of loopy to me. It’s like usually, you see the CEO you then’re like, “Okay, that was completely atrocious. I’d by no means put money into that particular person once more.” However then they only form of, like, resurface, like, a 12 months or two later elsewhere.
Dan: Identical factor in politics. I imply, it’s wonderful how the market forgives. So, we obtained out of a brief enterprise. It turned a market timing recreation, and we weren’t out there timing. We simply sort of ran longs. So, that’s how the technique first obtained began. It was fairly attention-grabbing.
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 recognize what? That is truly 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 method is knowing folks which can be within the trenches with the CEOs. And so, I’d converse with Wall Road analysts again then and ask them questions like, “Of the businesses you comply with, who do you assume 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 truly say, “Okay, give me a narrative. Give me a purpose.” That information and that data relayed would then sort of be markers that we’d have the ability to use in our grading scorecard for every dialog and every bit of knowledge that we discovered that was related to the knowledge we’re searching for. Every CEO had a distinct rating, and it was all pushed by this evaluation. And so, we’re sort of making an attempt to create a steadiness sheet nearly on character and apply it and actually attempt to power a self-discipline round it. And I believe that’s actually essential as a result of this isn’t opinion-based. You might be on the market looking for markers of character. I imply, a variety of the issues that the road sort of throws out on the ground doesn’t know the right way to worth. And we expect it’s beneficial once we know a CEO may put the corporate earlier than their very own curiosity. And we expect it makes a giant distinction. These are the sorts of items of knowledge that we’re continuously on the market making an attempt to reap and arrange, to your level.
Meb: I think about a variety of the listeners are listening to this and making an attempt to conceptualize of their heads and saying, “Okay, properly, it appears difficult to have the ability to bucket folks into good, dangerous, or a spectrum.” So, inform us a bit bit about…and this might be the historic information versus thought, however the idea, let’s get a bit extra concrete on, like, what’s truly going into how the sausage will get made about, is that this a character-driven CEO or not?
Dan: What we’re utilizing immediately… I got here again to this final two years. And one of many attention-grabbing issues that motivated me have been the next. One, it felt like character wanted to be firmed on the earth, that means that it mattered. And there wasn’t a variety of locations the place you may sort of specific 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, that means it didn’t have a correlation to conventional elements. So, we expect 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 immediately, I Googled, “Does anybody care about character as soon as?” And up popped this e-book known as “Return on Character,” which is what we named our fund after. And it was a e-book written by Fred Kiel revealed by “Harvard Enterprise Evaluate.”
Fred performed a seven-year examine on the impression 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 information level that simply, once more, affirmed the technique as a beneficial 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 making an attempt to grasp the right way to analyze CEOs immediately for this attribute. Considered one 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 elements, integrity, duty, forgiveness, and compassion. And so, we’re continuously searching for markers in a type of 4 areas to have the ability to create and construct the composite character rating.
However our first display was utilizing behavioral integrity evaluation with the professors that KRW introduced from College of Virginia, Duke, and Yale to run our first display. And we ran a display on I believe 700 firms, the biggest 700 firms within the Russell. And that introduced our record right down to a smaller composite. Then, our subsequent step was publicly obtainable information and scrubbing all these sources for markers of duty, forgiveness, and compassion, three different elements of character. And that was carried out 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 simply’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: Possibly this will likely be useful for listeners, you don’t have to present away the golden system or something proprietary, however it appears simple simply to say, “Okay, like, integrity, forgiveness, duty.” Like, what does that really imply if you’re saying sort of on a quantitative degree? Like, how does that really display…? Most individuals, it in all probability 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 a lot of the Russell 1000 that we use to do our first display 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. 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 decisions, issues like proudly owning errors after they screw up, embrace this duty, making an attempt to go away 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 recognize, 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 totally different workers. We go after language movies performed with the CEOs and search for markers or examples of those three different traits. We additionally learn articles on all these numerous totally different CEOs and, once more, making an attempt to search for these markers sort 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 supply 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, 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 alerts…and it may be each side, the constructive alerts actually bubble up the very best, or is it extra just like the unfavorable ones kick folks out? So, like, I’m simply making an attempt to consider, like, the megalomaniac CEO that possibly, okay, on a few these, however it simply completely has no self-awareness with duty and blames different… How does the composite form of work?
Dan: We don’t are likely to concentrate on the negatives. I’ll inform you that the habits integrity display that we use, the Wirecard occasion, an instance of a giant blowup in Germany, and this course of flagged the unfavorable there. Our orientation isn’t across the unfavorable. Typically, 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 making an attempt 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 firms and all sectors, mark cap-weighted. And we simply assume that this may outperform over time greater than it received’t.
Meb: There’s two components of this that I’d like to the touch on. One is that you simply truly did tremendous, and you’ll converse to it, like what the unfold was. As a result of, like, a variety of the dialogue about…to not lump you in ESG, however ESG form 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 state of affairs, you’re not solely saying, “Hey, look, let’s make investments with these people who find themselves higher stewards,” but in addition, this will likely truly outperform. Is that form of a part of the argument? And if that’s the case, discuss to us a 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 expect 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 e-book, “Return on Character,” I imply, “Harvard Enterprise Evaluate,” you have a look at that and all of the proof is there. You have a look at Collins’ e-book 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 firms carry out. After which, I’ve my very own expertise, the place I truly ran this technique earlier than, throughout 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 carried out if we saved it going. And that very same outperformance continued for 20 years.
And so, you recognize higher than anyone, previous efficiency isn’t a prediction of future efficiency. However we expect 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 mixture of market situations and enterprise mannequin. Enterprise fashions for giant firms just like the Russell 1000, they’re all fairly related as you go sector to sector. The largest alternative for change in an organization good and dangerous actually turns into the 30%, and that’s administration and management. And management is one thing that we expect is instantly correlated to habits. 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 positive everybody listening can say sure.
Dan: You realize, the distinction and the way it makes you’re feeling. You’re both leaving the day feeling constructive about life and hopeful understanding someone’s obtained your again, or somebody’s making an attempt 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 if you greet your children if you get house. And we simply assume that there’s a variety of argument for why that is an economically rational method. However we additionally assume its consequential impression is equally beneficial within the sense that if we’re, as a market, as buyers, making an attempt to allocate our capital into firms which can be champion or a minimum of working in direction of this sort of habits, that makes one other huge distinction too. And if we may someway begin to sway the way in which folks take into account how they rent CEOs and leaders, as a result of we’ve been in a position to present that this truly issues after which truly outperforms over time, that may be an incredible byproduct of the outperformance that we hope to have the ability to present.
Meb: The composite rating, how does this truly work? So, do you guys have like a 0 to 100 composite rating and also you’re actually searching 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 firms. It’s not like we now have 500.
Meb: And what’s the universe?
Dan: Russell 1000. We solely obtained information on roughly 700 firms. And we’re staying sort 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 attention-grabbing too is that Fred’s analysis, “Return on Character,” confirmed that high-character CEOs’ firms tended to have a better return on fairness and decrease debt ratios. We went and performed our evaluation on our present portfolio. Our firms have the identical sort of leaning as properly, decrease debt, increased return on fairness. We haven’t been in a position to 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 might be the objective. Typically, we are able to acquire some understanding of the C-suite, typically we are able to’t. However we now have to start out with the CEO. Typically, if in case you have a high-character CEO, your odds of them having a really high-leaning character of C-suite is way 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 house at understanding this one sliver of the market over the course of our existence. And so, we’re simply continuously searching for methods to be higher. And stepping into the C-suite at a deep degree can be a long-term goal, for positive.
Meb: Discuss to me about how usually are you this? Is it continuous? Is it every year? How does it get examined?
Dan: We steadiness, if wanted, each quarter. After which we’re continuously watching our CEOs and our firms. One of many issues that it’s essential to make a distinction right here is that we don’t see character as one thing meaning errors received’t be made. In actual fact, we frequently see when folks screw up, like once I screw up or anyone, it’s like the final word check to take a look at character. Once we’re reviewing all our CEOs, we’re continuously searching 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, once I first did this fund, I obtained to know Jim Sinegal of Costco as a result of he popped up on the record. He was one among 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 packing containers at Costco. Have you ever ever been to Costco?
Meb: Yeah, however it’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 little thing else, and watches, and issues like that. And so they had an indication that stated, “Diamonds lower like Tiffany diamonds.” And Jim had expressed some fear about it. However finally, someone forgot to place lower like and simply put Tiffany diamonds within the case. And positive sufficient, Tiffany is available in. It’s sort of upset. And so they lawyer up and Costco lawyer stated to lawyer up. And Craig sort 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 an incredible instance of character that bleeds into, not solely his however the firm’s repute. And I believe you see it performed out in that firm even immediately. 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 obtained is it a subjective transition? Have been you want, “Okay, this gal seems to be fairly first rate too?” How do you deal with that, which I assume occurs not too sometimes?
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 among our situations.
Meb: How do you deal with one thing factor like, “Okay, we obtained a highly-rated CEO,” after which they do one thing that may knock their rating down. So, I don’t know, simply 2022, they get cancelled for doing X, which was a foul habits, no matter it could that may journey your sign. Is it like a direct, or do you then need to, like, apply a lens and say, “Okay, we have to study this as a result of possibly it’s not what we expect?” How does that play into the portfolio from that time?
Dan: We might undoubtedly have to look at the scenario to essentially perceive precisely what the journey up was. However that may be carried out fairly rapidly. And it wouldn’t be carried out essentially utilizing analytics. We might use our personal private judgment on the scenario, and whether or not or not we wanted to tug that CEO from the portfolio.
Meb: What is perhaps 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 which may give us a bit extra concrete, real-world feels about what these guys and gals are doing. Warren and Charlie in there? They obtained to be good behaviors, proper? The place do they rank?
Dan: Yeah, they’ve made it. Possibly, yeah.
Meb: Okay, as you say, you recognize, 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 variety of firms which can be very controversial, sarcastically. I imply, I believe our most controversial firm is a taser firm.
Meb: That’s an excellent query is how usually…? As a result of I think about folks listening, like, you’re not truly making use of the 4 standards to the precise working enterprise, or is there some form of spillover impact?
Dan: We’re probably not taking an ethical filter on the precise business enterprise. That’s one other degree. 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 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 variety of particular tales on the CEO once 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 reworking the tradition of that firm. UiPath’s CEO, Dan, was a very attention-grabbing 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 now have in our portfolio.
However we’re continuously searching for further inputs and understandings of present firms on the market within the market. And it’s enjoyable to be taught. I imply, it’s so enjoyable searching for one thing good versus searching for one thing dangerous. And it truly is thrilling when you’ll be able to begin seeing a development in a selected firm and perceive that, man, these are folks actually working making an attempt to do higher. Nicely, we are able to discuss in regards to the dangerous. That’s tremendous. Man, by the way in which, Kelleher, I used to have a quote of his hanging in my lavatory. And I’m going to muck it up. But it surely stated one thing alongside the traces of, “We now have 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 a number of names. You can provide me their ranking or in the event that they fall in or out. Elon, the place’s Elon as a CEO?
Dan: I have a tendency to take a look at the Elons of the world as productive narcissists, ones that you simply wouldn’t essentially wager in opposition to as a result of in a variety 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 sort of a strategy to make different folks look dangerous. We additionally don’t see character as a hard and fast factor. We predict it may be developed. Elon will be on the record. In a manner, I’m cheering for all 1,000 firms and the remainder emigrate this path. There are specific CEOs that aren’t on the record for apparent causes. However I believe we additionally know why the other of what we’re making an attempt to determine 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 believe 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 house.
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 excellent pals at Alpha Architect Western crew, proper? When did you guys launch?
Dan: March twenty fourth.
Meb: Current.
Dan: Yeah, so we’re simply out of the gate.
Meb: Simply out of the gate, that’s thrilling. I can do not forget that similar 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. Possibly like 2010, if I can bear in mind. So, inform us a bit bit the way you do that in observe, so, what number of names, how do they get weighted, when do they get rebounds, all that good 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 which may be driving it. And so, equal-weighted the market cap perspective. We rebalance as wanted each quarter. And we’re continuously monitoring and reviewing our record all year long, and in addition continuously searching for new CEOs as we go. Analysis is consistently in course of. And it’s designed, Meb, to be sort of a strategy to get market publicity, however solely allocate your cash to management and corporations which can be pursuing this sort of habits. As an alternative of placing your cash on the broader market, that on character, or put money into character, we expect you’ll carry out over time. And likewise, it’s affirming one thing that I believe makes the world a bit higher. And that’s sort of the worth proposition as a result of we’re making an attempt to, in a manner, nearly create a personality market.
Meb: What has been the preliminary reception for the way persons are sort of receiving it? And what I imply by that’s not essentially are simply folks dumping hundreds of thousands of {dollars} into it however a variety of occasions, once we’ll launch a product or an thought, we’ll get some responses that we didn’t count on, or folks say, “Oh, attention-grabbing,” and never essentially in a unfavorable but in addition in a constructive manner. Or possibly they are saying this suits in differently or one thing. Like, what’s sort of been a number of the conversations you’re having and the way are folks excited about this right here in 2022?
Dan: Normally, it’s very uncommon folks don’t prefer it. It’s like this appeals to one thing nearly innate, and those who goes…it’s nearly like a duh. After all, 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 important to clarify it to your advisor and allocate parts of your present portfolio to [inaudible 00:32:34.364]. The delicate buyers are continuously it in comparison with every little thing else that they do. And I believe all of them just like the premise. They wish to see a monitor document over time, as most individuals would. However there’s an actual broad and normal openness to it I’ve discovered to date. There are all the time one or two individuals who assume that character doesn’t matter. They cite different firms the place our CEOs have outperformed, have carried out rather 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 acquired. 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 believe the SEC has ever authorised. And it’s a sort of a brand new different. 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’ve a pleasant web site that you simply’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, training, profession path, political stance, beliefs, faith, and household historical past, which I believed was nice.
Dan: It’s all research-based evaluation. The opposite attention-grabbing 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 sort of a illustration of character. So, we’d 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 primarily find yourself with some nation cultural ranks, I’d assume, the place some international locations, 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 attention-grabbing is the analysis exhibits that telling the reality is linked to integrity, taking tasks 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 sort of mix does usually outline, properly, that particular person’s obtained character. I’ve talked to Fred Kiel about this. And he says, “Yeah, it’s nearly like this common rule that sort 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 together with your habits kind, your character kind, for instance, you’re introvert otherwise you’re extrovert, it doesn’t matter. It might come up in any sort of human being.
Meb: It’s attention-grabbing as a result of there are a variety of further avenues this might go together with totally different subsets of the globe. As you concentrate on experiencing and refining the analysis within the coming horizon as you look out, what are some areas the place you’re sort 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 excited about as you look out to the longer term?
Dan: Once I look out to the longer term, I actually return to analysis and the way we will be higher at understanding this facet of the market. I can’t assist however assume in case you go on Amazon and also you have a look at this pen, for instance, they’ll have like 20 opinions on this pen. Folks take the time to jot down their opinions. A dream of mine can be to have the ability to present a strategy 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 information and utilizing it as an informative strategy to allocate investments. That’s one thing that I take into consideration so much and the way finest to do this as a result of I believe 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 right way to sort 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 suitable 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 recognize, on the similar time, the Glassdoor is completely unreliable as a result of it might be a bunch of workers that simply obtained fired?
Dan: Proper. I had one state of affairs the place I simply known as Christian leaders and stated, “Hey, this CEO is simply unimaginable. He’s obtained an unimaginable character.” However then all my evaluation on the CEO exhibits that he was extra like the final and some good males that put the concern of God in all subordinates. And so, you rapidly 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 are able to refine our evaluation utilizing quite a lot of totally different instruments, Glassdoor opinions are nice as some extent of consideration, not the purpose of consideration, the higher we’ll be at understanding. There’s a variety of instruments which can be obtainable immediately that haven’t been previously that may assist us acquire each an understanding of this facet of firms, not simply from the standpoint of, say, pure language processing, synthetic intelligence of habits, of language, but in addition simply folks’s skill to freely specific data. And people are all issues that I believe and hope that we are able to develop over time and actually enhance upon and make us smarter. And likewise, it’ll be sort of enjoyable is that it begins to point out in impact. CEOs truly assume twice earlier than they behave poorly as a result of habits begins to matter. That might be a neat byproduct.
Meb: Yeah, you simply begin publishing your record. 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 choose it up.” There’s a facet 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 pondering up the joint. Possibly you must take into consideration one thing else.” That might be an attention-grabbing, activist marketing campaign scenario. 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 will be an actual consciousness if the boards are asking the query, “Why isn’t my CEO on the record?” And if we are able to get that a lot traction, and we are able to reveal… 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 price proposition, our request out there is transfer proportion of that over to the character fund, VOC ETF, and get sort of the identical relative danger returns with the upside of character over time. The extra we are able to get folks investing in character and exhibiting that that issues, that they do care about habits, and that, in a manner, it’s sort of a vote that they consider it’s going to outperform, the extra consideration we’ll get, I believe, with these firms, with these board of administrators. That’s the long-term objective. We’re orienting ourselves in direction of making an attempt to construct a method that will likely be right here for 100 years. We don’t wish to promote it. I’ve obtained an unimaginable investor in Bridgeway Capital Administration, which is out of Houston, John Montgomery, and Tamra, the CEO there, our principal buyers. And we’re targeted on making an attempt 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 respect 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 assessment of our earlier portfolio and his head sort 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 immediately, however my unique technique, solely 30% of the outperformance was associated to elements, 70% John couldn’t clarify. And so, he obtained 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 normal 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: Nicely, I imply, you recognize, from my standpoint, I’m actually targeted on making an attempt to persuade folks to place 20%, 30% of their market publicity in ROC ETF. It’s a giant piece however we’re simply getting going. We’re trying to construct a neighborhood of those 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 searching 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 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 finally? 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 searching for ambassadors. Meb, would you be a ROC ambassador for us?
Meb: You bought to ship me some swag, and a minimum of 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 attention-grabbing. I 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, trying again over time? You’ve carried out so much, been in a variety of locations. Something that seared into your mind?
Dan: Nicely, I believe 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 lot 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 usually you could be within the funding world and truly develop into higher as a consequence of your focus. On this case, that was in all probability my best wager. And the best final result is with the ability to sort of show that it does matter, you recognize, and it really works. That’s what I’d maintain up for instance.
Meb: All proper, properly, listeners, all my public firm CEOs, in case you’re not on their holdings record, you bought to achieve 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 unsuitable right here?”
Dan: Meb, I believe it’s essential 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 known as KRW Worldwide. And so they go into enormous firms and assist firms 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, truly is the answer to this facet of the coin. We’re solely trying to attempt to determine KRW Worldwide after which those I labored with on the analysis entrance can present an answer to get firms sort of trying 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 may also discover me on LinkedIn. I welcome folks reaching out, giving me their opinion on totally different firms or concepts. The extra we are able to rally collectively… If ever there was a neighborhood 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 firms are conversant in them from knowledgeable standpoint, we welcome the dialogue. I stay up for listening to from folks.
Meb: Superior, man. Dan, it’s been a blast. Thanks a lot for becoming a member of us immediately.
Dan: Yeah, it was an honor. I actually respect it.
Meb: Podcast listeners, we’ll publish present notes to immediately’s dialog at mebfaber.com/podcast. When you love the present, in case you hate it, shoot us suggestions at [email protected]. We like to learn the opinions. Please assessment us on iTunes and subscribe to the present, anyplace good podcasts are discovered. Thanks for listening, pals, and good investing.