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Episode #420: Dan Cooper, ROC Investments – ROC: Return on Character
Visitor: Dan Cooper is the founder and CEO of ROC Investments, which allocates capital on the premise of the behaviors of the CEOs and their senior government groups.
Date Recorded: 5/11/2022 | Run-Time: 50:11
Abstract: Dan shares how he ran a method centered on investing in firms with CEO’s that show excessive character earlier in his profession. When he later seemed again on the returns and located conventional components solely defined 30% of the technique’s outperformance, he determined to launch an ETF based mostly on that technique, ticker R-O-C-I.
He shares how he defines character, how he quantifies it, after which how he implements it right into a portfolio. Lastly he shares what CEO’s exemplify this technique with tales of executives of Costco, Southwest & Microsoft.
Feedback or solutions? Thinking about sponsoring an episode? E-mail us Suggestions@TheMebFaberShow.com
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 growing a guidelines based mostly character fund
- 11:00 – How Dan decides who’s a high-character CEO
- 18:48 – Quantitative research and the way to consider this as an funding technique; Return on Character
- 22:32 – Overview of how the composite rating works, how 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 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’ve got a extremely enjoyable present for you at this time. Our visitor is Dan Cooper, founder and CEO of ROC Investments, which allocates capital on the premise of the behaviors of the CEOs and their senior government groups. Dan shares how he ran a method centered on investing in firms with CEO’s that show excessive character earlier in his profession. When he later seemed again on the returns and located conventional components solely defined 30% of the technique’s outperformance, he determined to launch an ETF based mostly on that technique, ticker R-O-C-I. He shares how he defines character, how he quantifies it, after which how he implements it right into a portfolio. Lastly he shares what CEO’s exemplify this technique with tales of executives of Costco, Southwest & Microsoft. Please take pleasure in this episode with ROC Investments’ Dan Cooper.
Meb: Dan, welcome to the present.
Dan: Nice to be with you.
Meb: Redding, California. What are you doing up in Redding, close to Mount Shasta? I’ve hiked that when upon a time.
Dan: You probably did?
Meb: I did.
Dan: Yeah, I did it too. It’s definitely worth the hike. It’s received a fantastic view, supplied there’s not smoke within the space. And we’re getting plenty 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’ve got two boys, and we love clear mountain streams, and rivers, and lakes, and 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 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 lodge 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 automotive, wakened, and began strolling in the midst of the night time. And listeners, in the event you’ve by no means been 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 crucial religious, simply memorable moments of my life was strolling. I simply ultimately turned off my headlamp, so that you’re simply strolling at midnight and this path. And ultimately, you come out of the forest and also you see Shasta with simply stars behind it. And I used to be identical to, “Wow, okay, that is tremendous particular.” Anyway, superior journey. I keep in mind sliding down with my axe, my ice axe, and sitting on my backpack to go down means quicker as a result of I used to be exhausted at that time. I keep in mind very particularly attending to a velocity the place I believed, you recognize what? There’s no turning again, however I’m going means too quick. And in the event you’ve ever seen these movies on TV the place folks’s just like the ice axe by way of 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 wakened early identical to you guys, otherwise you did while you’re by your self. We received about halfway up the mountain and the solar began arising 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 onerous 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 just a little 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 means by way of faculty working my poison ivy killing enterprise in Boston the place my dad and mom dwell. I used to be often called Dan, the poison ivy man. All people had it, no one needed it, and I used to be the one one silly sufficient to go eliminate it. So, after I graduated from faculty, that’s all I actually knew easy methods 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 have been the biggest choices and futures agency on this planet again then. And so they traded I believe one thing like ridiculous quantities within the quantity of whole market. I joined him after he had bought to Financial institution of America. We have been managing his personal cash. We all the time had quant fashions going that Joe was growing. We’re allocating capital by way of 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 making an attempt to assist Iraq after the primary invasion with the financial sanctions, working with the three non secular leaders there. After which we’re in the midst 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 type of opened the world to me in a means that was simply unbelievable. The opposite factor I did with Joe’s after 9/11, I used to be uninterested in overseas diplomacy and politics. I launched the primary character fund. That’s based mostly on what I’m doing at this time.
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 great ones have been, who the CEOs that really have character as a result of I believe that’d be an unbelievable long-term predictor of a efficiency of an organization.” And he was all the time coming at it from the standpoint of a coach. He mentioned, “It’s going to be tough to investigate Wall Avenue and each side of taking the identified knowledge swimming pools and reduce them in numerous methods.” However I believe we could possibly be higher than the market at understanding this one phase of the market, which is character. And on the time, I used to be studying Collins’ guide, “Good to Nice.” After which, I used to be additionally making an attempt to deliver an organization to Japan known as Tal Plus [SP] out in Nebraska. And so they develop behavior-based interview techniques to quantify the diploma through 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 premise of this one standards after which allotted capital.
Initially, we went quick. We additionally type of surveyed for the dangerous guys. And we had a nasty man record and an excellent particular person record. And we went quick. The dangerous CEOs, alongside the great ones rapidly discovered that the shorts type of have been consuming our shorts, actually killing us, as a result of they have been the perfect at manipulating fact.
Meb: They exist within the pump and dump world. And it’s humorous, by the best way, you comply with a few of the actual dangerous, which, surprisingly, typically, for some cause, gave the impression to be positioned in Salt Lake Metropolis, Vancouver, another locales. However they proceed to have 9 lives, which is type of loopy to me. It’s like usually, you see the CEO then you definately’re like, “Okay, that was completely atrocious. I might by no means put money into that particular person once more.” However then they simply form of, like, resurface, like, a 12 months or two later some other place.
Dan: Identical factor in politics. I imply, it’s wonderful how the market forgives. So, we received out of a brief enterprise. It grew to become a market timing sport, and we weren’t available in the market timing. We simply type 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 perhaps 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 discovered actually fast, Meb, was that individuals that knew CEOs on the golf membership or church pews didn’t know CEOs. I imply, one of the simplest ways to get to this understanding, the holy grail of this method is knowing folks which might be within the trenches with the CEOs. And so, I might communicate with Wall Avenue 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 boastful?” And so they couldn’t simply say… They might truly say, “Okay, give me a narrative. Give me a cause.” That knowledge and that data relayed would then type of be markers that we’d be capable to use in our grading scorecard for every dialog and each bit of information that we discovered that was related to the data we’re on the lookout for. Every CEO had a unique rating, and it was all pushed by this evaluation. And so, we’re type of making an attempt to create a steadiness sheet virtually 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’re on the market looking for markers of character. I imply, plenty of the issues that the road type of throws out on the ground doesn’t know easy methods to worth. And we predict it’s useful after we know a CEO may put the corporate earlier than their very own curiosity. And we predict it makes an enormous distinction. These are the sorts of items of information that we’re always on the market making an attempt to reap and set up, to your level.
Meb: I think about plenty 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 just a little bit about…and this could possibly be the historic knowledge versus thought, however the idea, let’s get just a little 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 at this time… I got here again to this final two years. And one of many fascinating issues that motivated me have been the next. One, it felt like character wanted to be firmed on this planet, that means that it mattered. And there wasn’t plenty of locations the place you could possibly type of categorical your worth for it. Two, I went and did some again checks 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 components, 70% was unexplainable, that means it didn’t have a correlation to conventional components. So, we predict we’ve got stumbled onto a brand new, if you’ll, issue because it pertains to driver for efficiency. Then, throughout these 20 years, after I wasn’t engaged on the technique, and quick ahead to at this time, I Googled, “Does anybody care about character as soon as?” And up popped this guide known as “Return on Character,” which is what we named our fund after. And it was a guide written by Fred Kiel printed by “Harvard Enterprise Evaluate.”
Fred carried out a seven-year research on the affect of excessive character CEOs versus low character CEOs, and do they outperform? And his outcomes present that top character CEOs outperform low character CEOs by 5X, as measured by return on property. And that was one other knowledge level that simply, once more, affirmed the technique as a useful 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 easy methods to analyze CEOs at this time for this attribute. One in every of their companions, analysis collaborators, they’re working with these college professors that have been utilizing behavioral integrity, pure language processing to measure integrity. Now, to interrupt down character, we outline it in 4 alternative ways, or having 4 parts, integrity, accountability, forgiveness, and compassion. And so, we’re always on the lookout 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 out there knowledge and scrubbing all these sources for markers of accountability, forgiveness, and compassion, three different parts 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 aware of the sector, “Inform me concerning the CEOs within the sector that you simply’re aware of.” and we run them by way of 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 can be useful for listeners, you don’t have to present away the golden formulation or something proprietary, however it appears straightforward simply to say, “Okay, like, integrity, forgiveness, accountability.” Like, what does that really imply while you’re saying type of on a quantitative degree? Like, how does that really display…? Most individuals, it most likely sounds subjective. You’re doing an goal lens to this.
Dan: We use CEO shareholder letters and convention name communications. And so, we’ve got over 30 years of shareholder letter evaluation on many 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 comparable…? Is it language-based? Like, how do you establish for the others? What are they once more, compassion, forgiveness?
Dan: Integrity, accountability, takes accountability for private selections, issues like proudly owning errors once they screw up, embrace this accountability, 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 incorrect. 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 varied totally different staff. We go after language movies carried out with the CEOs and search for markers or examples of those three different traits. We additionally learn articles on all these varied totally different CEOs and, once more, making an attempt to search for these markers type 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 best way through 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, while 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 either side, the constructive alerts actually bubble up the perfect, 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 perhaps, okay, on a few these, however it simply completely has no self-awareness with accountability and blames different… How does the composite form of work?
Dan: We don’t are inclined to concentrate on the negatives. I’ll let you know that the habits integrity display that we use, the Wirecard occasion, an instance of an enormous blowup in Germany, and this course of flagged the unfavorable there. Our orientation isn’t across the unfavorable. Usually, we simply attempt to 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 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 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 superb, and you may communicate to it, like what the unfold was. As a result of, like, plenty of the dialogue about…to not lump you in ESG, however ESG form of umbrella, “Look, hey, we might or might not outperform.” However it is a higher means 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 truly outperform. Is that form of a part of the argument? And in that case, discuss to us just a little bit concerning the quantitative research or analysis, how to consider that.
Dan: No, our competition is that even in the event you don’t imagine in character, we predict it is a good funding technique as a result of the analysis actually factors to it. You take a look at Fred Kiel’s guide, “Return on Character,” I imply, “Harvard Enterprise Evaluate,” you take a look at that and all of the proof is there. You take a look at Collins’ guide and he cites the extent 5 leaders. There’s all these totally different analysis markers. I imply, there’s quite a few research on humility that’s come out that has an enormous impact on management and its consequence in the best way 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 stored 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 predict that there’s actually one thing there on simply the efficiency aspect. One other factor too, research have proven that 70% of an organization’s efficiency is a mixture of market circumstances and enterprise mannequin. Enterprise fashions for giant firms just like the Russell 1000, they’re all fairly comparable 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 predict is straight correlated to habits. And it issues particularly… Have you ever ever labored for somebody that was a nasty boss?
Meb: Yeah, properly, let’s not name out any on the podcast particularly by title. 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 associate 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 are feeling. You’re both leaving the day feeling constructive about life and hopeful figuring out someone’s received 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 best way you work together together with your colleagues at work. It has an impact on the best way you drive your automotive house and while you greet your youngsters while you get house. And we simply assume that there’s plenty of argument for why that is an economically rational method. However we additionally assume its consequential affect is equally useful within the sense that if we’re, as a market, as traders, making an attempt to allocate our capital into firms which might be champion or no less than working in the direction of this sort of habits, that makes one other massive distinction too. And if we may someway begin to sway the best way folks contemplate 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 might be a fantastic 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 on the lookout for the highest quintile, or quartile, or one thing?
Dan: The tails of the bell curve, on the finish of the day, we solely have 106 firms. It’s not like we’ve got 500.
Meb: And what’s the universe?
Dan: Russell 1000. We solely received knowledge on roughly 700 firms. And we’re staying type of within the bigger universe as a result of we actually need this to be a solution to get market publicity. We’ve got a barely decrease beta than the market. What’s fascinating too is that Fred’s analysis, “Return on Character,” confirmed that high-character CEOs’ firms tended to have the next return on fairness and decrease debt ratios. We went and carried out our evaluation on our present portfolio. Our firms have the identical type 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 way of our evaluation. However that’s one other indicator that Kiel recognized as a constant side 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 may be the objective. Generally, we will acquire some understanding of the C-suite, generally we will’t. However we’ve got to start out with the CEO. Usually, when you’ve got 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 perfect within the house at understanding this one sliver of the market over the course of our existence. And so, we’re simply always on the lookout for methods to be higher. And entering into the C-suite at a deep degree could be a long-term goal, for positive.
Meb: Speak to me about how typically are you this? Is it continuous? Is it yearly? How does it get examined?
Dan: We steadiness, if wanted, each quarter. After which we’re always 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 which means errors received’t be made. In reality, we regularly see when folks screw up, like after I screw up or anyone, it’s like the last word take a look at to take a look at character. Once we’re reviewing all our CEOs, we’re always on the lookout for how they react to the challenges, what’s it that they do once they do screw up? Do they personal it or not? An ideal instance of that, after I first did this fund, I received to know Jim Sinegal of Costco as a result of he popped up on the record. He was certainly 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, that they had a situation the place that they had these little indicators of their jewellery bins 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 mentioned, “Diamonds reduce like Tiffany diamonds.” And Jim had expressed some fear about it. However ultimately, someone forgot to place reduce like and simply put Tiffany diamonds within the case. And positive sufficient, Tiffany is available in. It’s type of upset. And so they lawyer up and Costco lawyer mentioned to lawyer up. And Craig type 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 repute. And I believe you see it performed out in that firm even at this time. These sorts of issues matter.
Meb: So, a few questions. You talked about CEO transition. So, what do you do? Do you simply should, like, restart the rankings throughout? What occurs in that situation the place you’ve received is it a subjective transition? Have been you want, “Okay, this gal appears fairly first rate too?” How do you deal with that, which I assume occurs not too occasionally?
Dan: Yeah, no, we exit the place anytime a CEO leaves. We’ve got to run a brand new evaluation on that, which takes a while, a part of certainly one of our circumstances.
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 nasty habits, no matter it could that might journey your sign. Is it like a right away, or do you then should, like, apply a lens and say, “Okay, we have to look at this as a result of perhaps it’s not what we predict?” How does that play into the portfolio from that time?
Dan: We might undoubtedly have to look at the scenario to actually perceive precisely what the journey up was. However that might 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 would have liked to tug that CEO from the portfolio.
Meb: What could be useful is to perhaps undergo both some good ones and provides some examples and/or some who’s lacking and provides some examples. I believe that may give us just a little 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, you recognize, perhaps 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 plenty of firms which might be very controversial, paradoxically. I imply, I believe our most controversial firm is a taser firm.
Meb: That’s an excellent query is how typically…? 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 trade enterprise. That’s one other degree. And it will get messy fairly fast, so far as all people has totally different opinions. And so, we attempt to keep impartial there. Some real-life examples, I imply, there’s some previous ones which might be nice, Herb Kelleher at Southwest, Jim Sinegal of Costco. We had Claiborne Deming at Murphy Oil. To this point, one of many issues that’s a component of our course of is that we don’t essentially dig into plenty 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 extremely fascinating man. Their main precept is humility as an organization, which I believed was actually fascinating so far as simply an antidote of a kind of firm that we’ve got in our portfolio.
However we’re always on the lookout for extra inputs and understandings of present firms on the market within the market. And it’s enjoyable to study. I imply, it’s so enjoyable on the lookout for one thing good versus on the lookout for one thing dangerous. And it truly is thrilling when you’ll be able to begin seeing a pattern in a particular firm and perceive that, man, these are folks actually working making an attempt to do higher. Properly, we will discuss concerning the dangerous. That’s superb. Man, by the best way, Kelleher, I used to have a quote of his hanging in my lavatory. And I’m going to muck it up. But it surely mentioned one thing alongside the traces of, “We’ve got 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 may give 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 guess towards as a result of in plenty 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 wish to go unfavorable however we additionally don’t like to speak about our record as being type of a solution to make different folks look dangerous. We additionally don’t see character as a set factor. We expect it may be developed. Elon will be on the record. In a means, I’m cheering for all 1,000 firms and the remainder emigrate this course. There are particular CEOs that aren’t on the record for apparent causes. However I believe we additionally know why the other of what we’re making an attempt to establish is tremendous harmful. We wish to affirm the great aspect of the bell curve. We wish to discover the few which might be over right here. And the few which might be over right here, we simply wish to keep away from. And I believe most individuals ought to wish to keep away from them. However we’re not within the enterprise actually, Meb, of figuring out them. It’s simply not our house.
Meb: No, it is sensible. By the best way, you guys, listeners, Dan has launched an ETF, the ROCI ETF, nice ticker, with our excellent buddies at Alpha Architect Western crew, proper? When did you guys launch?
Dan: March twenty fourth.
Meb: Latest.
Dan: Yeah, so we’re simply out of the gate.
Meb: Simply out of the gate, that’s thrilling. I can keep in mind that identical to yesterday, our first fund.
Dan: When did you launch your first fund, Meb?
Meb: 2013. We sub-advised one in post-financial disaster, sooner than 2013. Perhaps like 2010, if I can keep in mind. So, inform us just a little bit the way you do that in apply, so, what number of names, how do they get weighted, when do they get rebounds, all that great things.
Dan: We’ve got 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 wish the technique to any outperformance that we carry out to be actually attributed to character versus any components that could be driving it. And so, equal-weighted the market cap perspective. We rebalance as wanted each quarter. And we’re always monitoring and reviewing our record all year long, and in addition always on the lookout for new CEOs as we go. Analysis is consistently in course of. And it’s designed, Meb, to be type of a solution to get market publicity, however solely allocate your cash to management and firms which might be pursuing this sort of habits. As a substitute of placing your cash on the broader market, that on character, or put money into character, we predict you’ll carry out over time. And in addition, it’s affirming one thing that I believe makes the world just a little higher. And that’s type of the worth proposition as a result of we’re making an attempt to, in a means, virtually create a personality market.
Meb: What has been the preliminary reception for the way individuals are type of receiving it? And what I imply by that isn’t essentially are simply folks dumping hundreds of thousands of {dollars} into it however plenty of occasions, after we’ll launch a product or an thought, we’ll get some responses that we didn’t count on, or folks say, “Oh, fascinating,” and never essentially in a unfavorable but additionally in a constructive means. Or perhaps they are saying this suits in another way or one thing. Like, what’s type of been a few of the conversations you’re having and the way are folks eager 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 virtually innate, and those who goes…it’s virtually like a duh. In fact, that is sensible. And the typical investor will say folks which might be within the trade completely like it. They have an inclination 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 traders are always 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 up to now. 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, they usually don’t have character. And so, that’s all the time straightforward to do. However, on the whole, it’s been very properly acquired. And the primary factor is simply getting the phrase out that there’s now some first time. I keep in mind the primary behavior-based funding product I believe the SEC has ever permitted. And it’s a type 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 means to try this.
Meb: You could have a pleasant web site that you simply’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, trade, 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 fascinating factor is that the 4 traits discovered that we outline this character, integrity, accountability, forgiveness, and compassion are additionally the traits in different cultures which might be attributed to the definition of character. And so, this isn’t simply, say, an American factor. Most societies would acknowledge that these 4 areas introduced collectively Is type 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 might assume, the place some international locations, simply by the best way that individuals are wired socially, that they might have decrease weights on a few of these.
Dan: See, that’s the factor that’s fascinating is the analysis reveals that telling the reality is linked to integrity, taking duties for while you screw up is linked to accountability, forgiveness, forgiving different folks once they screw up, compassion, empathy for others. Anytime these 4 traits type 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 virtually like this common rule that type of runs by way of 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 habits kind, your persona kind, for instance, you’re introvert otherwise you’re extrovert, it doesn’t matter. It may come up in any type of human being.
Meb: It’s fascinating as a result of there are plenty of extra avenues this might go along with totally different subsets of the globe. As you consider experiencing and refining the analysis within the coming horizon as you look out, what are some areas the place you’re type 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 eager about as you look out to the longer term?
Dan: After I look out to the longer term, I actually return to analysis and the way we will be higher at understanding this side of the market. I can’t assist however assume in the event you go on Amazon and also you take a look at this pen, for instance, they’ll have like 20 opinions on this pen. Individuals take the time to put in writing their opinions. A dream of mine could be to have the ability to present a solution to begin to present a voice to folks which might be working within the trenches and to have the ability to begin offering perspective on the best way 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 quite a bit and the way finest to try this as a result of I believe there’s lots of people which have quite a bit 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 easy methods to type 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 proper 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 identical time, the Glassdoor is completely unreliable as a result of it could possibly be a bunch of staff 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 rapidly discovered that the best way 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 totally different instruments, Glassdoor opinions are nice as a degree of consideration, not the purpose of consideration, the higher we’ll be at understanding. There’s plenty of instruments which might be out there at this time that haven’t been up to now that may assist us acquire each an understanding of this side of firms, not simply from the standpoint of, say, pure language processing, synthetic intelligence of habits, of language, but additionally simply folks’s capability to freely categorical data. And people are all issues that I believe and hope that we will develop over time and actually enhance upon and make us smarter. And in addition, it’ll be type of enjoyable is that it begins to indicate in impact. CEOs truly assume twice earlier than they behave poorly as a result of habits begins to matter. That may 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 aspect enterprise for you, promoting entry to the record of all the general public boards across the nation and being like, “Yo, you guys, your CEO is pondering up the joint. Perhaps it’s best to take into consideration one thing else.” That may be an fascinating, activist marketing campaign scenario. You’re going to get… Elliott, in the event you’re listening to this podcast, Carl Icahn, in the event you’re listening, right here’s your targets proper right here.
Dan: It might be an actual consciousness if the boards are asking the query, “Why isn’t my CEO on the record?” And if we will get that a lot traction, and we will 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 available in the market is transfer proportion of that over to the character fund, VOC ETF, and get type of the identical relative danger 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 habits, and that, in a means, it’s type of a vote that they imagine it should 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 the direction of making an attempt to construct a method that can 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 traders. And we’re centered on making an attempt to create a product that’s out there for so long as folks care about character available in the market, 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 absolutely, I actually do recognize you having us on.
Meb: Oh, it’s enjoyable. John is a former podcast alum, listeners, episode 323, if you wish to 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 evaluation of our earlier portfolio and his head type of fell off his shoulders once they noticed and found this sort of what we name the character issue. That unique efficiency will not be associated to our fund at this time, 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 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 must always have talked about X, Y, Z,” or we’d lined all? What else is in there?
Dan: Properly, I imply, you recognize, from my standpoint, I’m actually centered on making an attempt to persuade folks to place 20%, 30% of their market publicity in ROC ETF. It’s an enormous piece however we’re simply getting going. We’re seeking to construct a group of those who assume character issues. We’re calling it ROC Ambassadors. The fund is connecting with different traders that assume it issues and wish to affirm it. So, we’re all the time on the lookout for folks,
Meb: How are you going to attach these? You guys are going to construct out a Slack channel, or is there going to be a means you’re going to carry the ROC convention sooner or later? What’s a great way for these guys to attach ultimately? You’re nonetheless brainstorming.
Dan: We’re nonetheless brainstorming. We’re a month out. We’d like to have a ROC convention, a Slack connection level. We’re on the lookout for ambassadors. Meb, would you be a ROC ambassador for us?
Meb: You bought to ship me some swag, and no less than one free fishing lesson in Northern California.
Dan: Completely, and a waterfall go to. Yeah, I believe you’d like that one too.
Meb: Cool. I’m going to hit you for the [inaudible 00:42:45.234] stuff. 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 imagine in, the place you’re, like, hopeful that that is the best way it really works and never the other. The great guys win, guys and gals. So, that’s fairly cool. What’s been your most memorable funding, wanting again over time? You’ve carried out quite a bit, been in plenty of locations. Something that seared into your mind?
Dan: Properly, 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 various these CEOs. And the neat factor about that’s that all of them are inclined to make you higher as an individual. And it’s not too typically which you could be within the funding world and really develop into higher as a consequence of your focus. On this case, that was most likely my biggest guess. And the best consequence is having the ability to type 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 the event 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 incorrect right here?”
Dan: Meb, I believe it’s essential to say, and it is 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 large firms and assist firms develop this side. And their competition 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 the event you’re not on the record, truly is the answer to this aspect 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 firms type 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 the perfect place?
Dan: Rocinvestments.com, www.rocinvestments.com is the place we dwell. And you may as well discover me on LinkedIn. I welcome folks reaching out, giving me their opinion on totally different firms or concepts. The extra we will rally collectively… If ever there was a group method to investing, it’s this as a result of all of us and many people dwell with these CEOs or dwell and work in these firms are aware of them from an expert standpoint, we welcome the dialogue. I sit up for listening to from folks.
Meb: Superior, man. Dan, it’s been a blast. Thanks a lot for becoming a member of us at this time.
Dan: Yeah, it was an honor. I actually recognize it.
Meb: Podcast listeners, we’ll put up present notes to at this time’s dialog at mebfaber.com/podcast. In case you love the present, in the event you hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the opinions. Please evaluation us on iTunes and subscribe to the present, anyplace good podcasts are discovered. Thanks for listening, buddies, and good investing.
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