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Episode #420: Dan Cooper, ROC Investments – ROC: Return on Character – Meb Faber Analysis


Episode #420: Dan Cooper, ROC Investments – ROC: Return on Character


Visitor: Dan Cooper is the founder and CEO of ROC Investments, which allocates capital on the idea of the behaviors of the CEOs and their senior government groups.

Date Recorded: 5/11/2022     |     Run-Time: 50:11

Abstract: Dan shares how he ran a technique centered on investing in corporations with CEO’s that show excessive character earlier in his profession. When he later regarded again on the returns and located conventional components solely defined 30% of the technique’s outperformance, he determined to launch an ETF based mostly on that technique, ticker R-O-C-I.

He shares how he defines character, how he quantifies it, after which how he implements it right into a portfolio. Lastly he shares what CEO’s exemplify this technique with tales of executives of Costco, Southwest & Microsoft.

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Hyperlinks from the Episode:

  • 1:11 – Intro
  • 1:54 – Welcome to our visitor, Dan Cooper
  • 4:26 – What led Dan to launch an ETF centered on character
  • 8:51 – The unique idea of creating a guidelines based mostly character fund
  • 11:00 – How Dan decides who’s a high-character CEO
  • 18:48 – Quantitative research and the way to consider this as an funding technique; Return on Character
  • 22:32 – Overview of how the composite rating works, how 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 conduct from CEOs?
  • 42:42 – Episode #323: John Montgomery, Bridgeway Capital Administration
  • 43:31 – Different ideas and insights about Dan’s technique and the ROCI ETF
  • 44:58 – Dan’s most memorable funding
  • 46:43 – Study extra about Dan Cooper;; LinkedIn


Transcript of Episode 420:

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Meb: Welcome podcast listeners, we now have a extremely enjoyable present for you in the present day. Our visitor is Dan Cooper, founder and CEO of ROC Investments, which allocates capital on the idea of the behaviors of the CEOs and their senior government groups. Dan shares how he ran a technique centered on investing in corporations with CEO’s that show excessive character earlier in his profession. When he later regarded again on the returns and located conventional components solely defined 30% of the technique’s outperformance, he determined to launch an ETF 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 acquired an amazing view, supplied there’s not smoke within the space. And we’re getting numerous that today up right here in Redding. We’ve been right here since 2012. I moved my household right here, along with my spouse. We now have two boys, and we love clear mountain streams, and rivers, and lakes, and mountain mountaineering, and tenting. We do a ton of tenting.

Meb: The hike up climb up Shasta for me, I did it on my own, and I made the error of doing all of it in in the future.

Dan: Oh, wow.

Meb: It was 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, should you’ve by no means been mountaineering at night time, it’s a really discomforting feeling for the primary quarter-hour and even the longer, proper? Like, that is bear territory, maybe. Nevertheless it was like a full moon. And one of the religious, simply memorable moments of my life was strolling. I simply ultimately turned off my headlamp, so that you’re simply strolling at the hours of darkness 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 similar 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 method 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 method too quick. And should 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 whenever you’re by your self. We acquired about halfway up the mountain and the solar began developing and the shadow of the mountain fell on the clouds under. It was a particular epic second. It’s a particular journey. It’s price 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 need to hear just a little bit about your background. You bought a enjoyable origin story. You spend a while on another nations and continents. Give us the timeline origin story for Dan.

Dan: Yeah, man. I began off fairly humble, nonetheless am fairly humble, labored my method by faculty working my poison ivy killing enterprise in Boston the place my dad and mom dwell. I used to be often known as Dan, the poison ivy man. All people had it, no one wished it, and I used to be the one one silly sufficient to go eliminate it. So, once I graduated from faculty, 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 fairly well-known buying and selling firm, which was known as Chicago Analysis and Buying and selling, CRT. And so they had 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 had been managing his personal cash. We all the time had quant fashions going that Joe was creating. We’re allocating capital by personal fairness and venture-type methods all around the world.

However we additionally did these loopy overseas diplomacy prompts. Joe would take his affect and attempt to make a distinction in Washington on areas of the a part of the world that he thought we’re lacking from a coverage standpoint. So, we labored on 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 course of Afghanistan pre 9/11. Two years earlier than 9/11, Joe and I had been working in Washington to attempt to discover a technique to overthrow the Taliban. And all these jobs form of opened the world to me in a method that was simply unbelievable. The opposite factor I did with Joe’s after 9/11, I used to be bored with overseas diplomacy and politics. I launched the primary character fund. That’s based mostly on what I’m doing in the present day.

Meb: What’s the yr within the timeline?

Dan: That was early 2000s, within the early 2000s. It got here from a dialog the place Joe and I used to be sitting round and he goes, “Man, I simply want I knew who the great ones had been, who the CEOs that really have character as a result of I believe that’d be an unbelievable long-term predictor of a efficiency of an organization.” And he was all the time coming at it from the standpoint of a coach. He stated, “It’s going to be tough to investigate Wall Avenue and each side of taking the identified knowledge swimming pools and minimize them in numerous methods.” However I believe we may very well be higher than the market at understanding this one section of the market, which is character. And on the time, I used to be studying Collins’ e book, “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 methods to quantify the diploma through which an individual matches 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 brief. We additionally form of surveyed for the unhealthy guys. And we had a foul man record and a superb individual record. And we went brief. The unhealthy CEOs, alongside the great ones shortly realized that the shorts form of had been consuming our shorts, actually killing us, as a result of they had been the very best at manipulating fact.

Meb: They exist within the pump and dump world. And it’s humorous, by the best way, you observe a few of the actual unhealthy, which, surprisingly, typically, 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 form of loopy to me. It’s like usually, you see the CEO then you definately’re like, “Okay, that was completely atrocious. I’d by no means put money into that individual once more.” However then they simply type of, like, resurface, like, a yr or two later some place else.

Dan: Identical factor in politics. I imply, it’s wonderful how the market forgives. So, we acquired out of a brief enterprise. It turned a market timing sport, and we weren’t available in the market timing. We simply form of ran longs. So, that’s how the technique first acquired began. It was fairly fascinating.

Meb: That’s a enjoyable inspiration. How early within the course of was this one thing that was quantified? And possibly it was from the get-go. And my notion, it’s like, you’re sitting across the early days, like, “All proper, this man’s whole wanker. This man is clearly a liar. This man is working this for his personal private profit,” no matter, on and on and on, or the place you, like, you 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 advanced 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 folks 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 strategy is knowing folks which can be within the trenches with the CEOs. And so, I’d communicate with Wall Avenue analysts again then and ask them questions like, “Of the businesses you observe, who do you suppose may put the corporate earlier than their very own pursuits? Who tends to be extra humble than they’re smug?” And so they couldn’t simply say… They might truly say, “Okay, give me a narrative. Give me a purpose.” That knowledge and that info relayed would then form of be markers that we’d be capable of use in our grading scorecard for every dialog and each bit of knowledge that we discovered that was related to the data we’re in search of. Every CEO had a unique rating, and it was all pushed by this evaluation. And so, we’re form of making an attempt to create a steadiness sheet virtually on character and apply it and actually attempt to pressure 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, numerous the issues that the road form of throws out on the ground doesn’t know the right way to worth. And we expect it’s priceless after 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 numerous the listeners are listening to this and making an attempt to conceptualize of their heads and saying, “Okay, nicely, it appears difficult to have the ability to bucket folks into good, unhealthy, or a spectrum.” So, inform us just a little bit about…and this may very well be the historic knowledge versus concept, 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 in the present day… I got here again to this final two years. And one of many fascinating issues that motivated me had been the next. One, it felt like character wanted to be firmed on this planet, which means that it mattered. And there wasn’t numerous locations the place you might form of categorical your worth for it. Two, I went and did some again exams on our earlier funding strategy. It seems that that mannequin that Joe and I developed collectively 20 years in the past carried out very, very nicely over the 20-year interval, which was one other living proof and proof that we’re on to one thing. The opposite factor we tried to do is we attempt to analyze it from an element’s perspective as to why, and solely 30% of the outperformance was explainable by conventional components, 70% was unexplainable, which means it didn’t have a correlation to conventional components. So, we 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 in the present day, 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 carried out a seven-year examine on the affect 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 belongings. And that was one other knowledge level that simply, once more, affirmed the technique as a priceless factor to attempt to work on. And so, what we did is I reached out to KRW, which is Fred’s firm. And so they lead our analysis in making an attempt to grasp the right way to analyze CEOs in the present day for this attribute. Considered one of their companions, analysis collaborators, they’re working with these college professors that had been utilizing behavioral integrity, pure language processing to measure integrity. Now, to interrupt down character, we outline it in 4 other ways, or having 4 parts, integrity, duty, forgiveness, and compassion. And so, we’re continuously in search of markers in a type of 4 areas to have the ability to create and construct the composite character rating.

However our first display screen was utilizing behavioral integrity evaluation with the professors that KRW introduced from College of Virginia, Duke, and Yale to run our first display screen. And we ran a display screen on I believe 700 corporations, the biggest 700 corporations 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 duty, forgiveness, and compassion, three different parts of character. And that was accomplished by three completely different folks independently, after which the composite character rating was added to the integrity rating. After which, we additionally conduct behavior-based interviews, the place we requested the road and requested folks 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 probably be useful for listeners, you don’t have to provide away the golden method or something proprietary, nevertheless it appears simple simply to say, “Okay, like, integrity, forgiveness, duty.” Like, what does that really imply whenever you’re saying form of on a quantitative degree? Like, how does that really display screen…? 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 many of the Russell 1000 that we use to do our first display screen utilizing behavioral integrity like pure language processing.

Meb: Cool. So, give me some extra examples. Okay, so the integrity, that’s like a language display screen. On the others, are they comparable…? Is it language-based? Like, how do you identify for the others? What are they once more, compassion, forgiveness?

Dan: Integrity, duty, takes duty for private selections, issues like proudly owning errors once 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 mistaken. 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 completely 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 numerous completely different CEOs and, once more, making an attempt to search for these markers form of popping up and discovering proof that, “Okay, we see this right here. We see him letting go of errors or making a mistake and proudly owning it,” or a sure degree of empathy and the best way through which they responded to COVID, for instance. All these issues start to offer factors and get factors to have the ability to give us a degree of confidence for these different three standards’s that we’re utilizing. After which the identical factor with behavior-based interviews, whenever 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 very best, or is it extra just like the damaging ones kick folks out? So, like, I’m simply making an attempt to think about, like, the megalomaniac CEO that possibly, okay, on a few these, nevertheless it simply completely has no self-awareness with duty and blames different… How does the composite type of work?

Dan: We don’t are likely to give attention to the negatives. I’ll let you know that the conduct integrity display screen that we use, the Wirecard occasion, an instance of a giant blowup in Germany, and this course of flagged the damaging there. Our orientation isn’t across the damaging. Usually, we simply attempt to give attention to what we name as a hyperlink rating. The decrease the hyperlink rating, the higher the outcomes because it pertains to behavioral integrity. And we aren’t screening for negatives. We’re simply 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 completely different corporations and all sectors, mark cap-weighted. And we simply suppose that this can 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 wonderful, and you’ll communicate to it, like what the unfold was. As a result of, like, numerous the dialogue about…to not lump you in ESG, however ESG type of umbrella, “Look, hey, we might or might not outperform.” However this can be a higher method 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 truly outperform. Is that type of a part of the argument? And if that’s the case, discuss to us just a little bit in regards to the quantitative research or analysis, how to consider that.

Dan: No, our rivalry is that even should 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 take a look at Fred Kiel’s e book, “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’ e book and he cites the extent 5 leaders. There’s all these completely different analysis markers. I imply, there’s quite a few research on humility that’s come out that has an enormous impact on management and its consequence in the best way corporations carry out. After which, I’ve my very own expertise, the place I truly ran this technique earlier than, through the time we had been invested for 4 years and we persistently outperformed the market. After which, we went again into the analysis on what it could have accomplished 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 mix of market situations and enterprise mannequin. Enterprise fashions for large corporations just like the Russell 1000, they’re all fairly comparable as you go sector to sector. The most important alternative for change in an organization good and unhealthy actually turns into the 30%, and that’s administration and management. And management is one thing that we expect is immediately correlated to conduct. And it issues particularly… Have you ever ever labored for somebody that was a foul boss?

Meb: Yeah, nicely, 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 actually labored with associate who had tough work experiences. Sure. And I’m positive everybody listening can say sure.

Dan: , the distinction and the way it makes you’re feeling. You’re both leaving the day feeling constructive about life and hopeful realizing anyone’s acquired your again, or somebody’s 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 automobile dwelling and whenever you greet your children whenever you get dwelling. And we simply suppose that there’s numerous argument for why that is an economically rational strategy. However we additionally suppose its consequential affect is equally priceless within the sense that if we’re, as a market, as buyers, making an attempt to allocate our capital into corporations which can be champion or a minimum of working in the direction of this sort of conduct, that makes one other huge distinction too. And if we might in some way 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 will be an amazing 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 in search of the highest quintile, or quartile, or one thing?

Dan: The tails of the bell curve, on the finish of the day, we solely have 106 corporations. It’s not like we now have 500.

Meb: And what’s the universe?

Dan: Russell 1000. We solely acquired knowledge on roughly 700 corporations. And we’re staying form of within the bigger universe as a result of we actually need this to be a solution to get market publicity. We now have a barely decrease beta than the market. What’s fascinating too is that Fred’s analysis, “Return on Character,” confirmed that high-character CEOs’ corporations tended to have the next return on fairness and decrease debt ratios. We went and carried out our evaluation on our present portfolio. Our corporations have the identical form of leaning as nicely, decrease debt, increased return on fairness. We haven’t been in a position to unnecessarily observe our worker engagement but by our evaluation. However that’s one other indicator that Kiel recognized as a constant side of CEOs that are typically on the upper finish of the character curve.

Meb: And so, you guys don’t simply do CEO. Do you do the entire C-suite? Do I recall that?

Dan: That may be the purpose. Generally, we will acquire some understanding of the C-suite, typically we will’t. However we now have to start out with the CEO. Usually, in case you have a high-character CEO, your odds of them having a really high-leaning character of C-suite is much better. And one of many issues that we’ve launched, we’re actually assured in our course of however our hope is to be the very best within the area at understanding this one sliver of the market over the course of our existence. And so, we’re simply continuously in search of 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 every year? How does it get examined?

Dan: We steadiness, if wanted, each quarter. After which we’re continuously watching our CEOs and our corporations. 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 have a look at character. Once we’re reviewing all our CEOs, we’re continuously in search of how they react to the challenges, what’s it that they do once they do screw up? Do they personal it or not? An excellent instance of that, once I first did this fund, I acquired to know Jim Sinegal of Costco as a result of he popped up on the record. He was one 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, they’d a state of affairs the place they’d these little indicators of their jewellery packing containers at Costco. Have you ever ever been to Costco?

Meb: Yeah, nevertheless 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 part else, and watches, and issues like that. And so they had an indication that stated, “Diamonds minimize like Tiffany diamonds.” And Jim had expressed some fear about it. However ultimately, anyone forgot to place minimize like and simply put Tiffany diamonds within the case. And positive sufficient, Tiffany is available in. It’s form of upset. And so they lawyer up and Costco lawyer stated to lawyer up. And Craig form of steps in and says, “Wait a minute, we screwed up. We have to personal this. We don’t 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 status. And I believe you see it performed out in that firm even in the present day. These sorts of issues matter.

Meb: So, a few questions. You talked about CEO transition. So, what do you do? Do you simply need to, like, restart the rankings throughout? What occurs in that state of affairs the place you’ve acquired is it a subjective transition? Had been you want, “Okay, this gal appears to be like fairly respectable 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 acquired a highly-rated CEO,” after which they do one thing that will knock their rating down. So, I don’t know, simply 2022, they get cancelled for doing X, which was a foul conduct, no matter it could that will journey your sign. Is it like a right away, or do you then need to, like, apply a lens and say, “Okay, we have to look at this as a result of possibly it’s not what we expect?” How does that play into the portfolio from that time?

Dan: We might positively have to look at the scenario to essentially perceive precisely what the journey up was. However that will be accomplished fairly shortly. And it wouldn’t be accomplished 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 likely to be useful is to possibly undergo both some good ones and provides some examples and/or some who’s lacking and provides some examples. I believe that may give us just a little extra concrete, real-world feels about what these guys and gals are doing. Warren and Charlie in there? They acquired to be good behaviors, proper? The place do they rank?

Dan: Yeah, they’ve made it. 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 numerous corporations which can be very controversial, sarcastically. I imply, I believe our most controversial firm is a taser firm.

Meb: That’s a superb 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 type of spillover impact?

Dan: We’re not likely taking an ethical filter on the precise business enterprise. That’s one other degree. And it will get messy fairly fast, so far as everyone has completely different opinions. And so, we attempt to keep impartial there. Some real-life examples, I imply, there’s some previous ones which can be nice, Herb Kelleher at Southwest, Jim Sinegal of Costco. We had Claiborne Deming at Murphy Oil. Up to now, one of many issues that’s a component of our course of is that we don’t essentially dig into numerous 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 now have in our portfolio.

However we’re continuously in search of extra inputs and understandings of present corporations on the market within the market. And it’s enjoyable to be taught. I imply, it’s so enjoyable in search of one thing good versus in search of one thing unhealthy. And it truly is thrilling when you’ll be able to begin seeing a pattern in a selected firm and perceive that, man, these are folks actually working making an attempt to do higher. Properly, we will discuss in regards to the unhealthy. That’s wonderful. 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. Nevertheless it 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 speak about just a few names. You can provide me their score or in the event that they fall in or out. Elon, the place’s Elon as a CEO?

Dan: I have a tendency to have a look at the Elons of the world as productive narcissists, ones that you simply wouldn’t essentially wager towards as a result of in numerous 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 damaging however we additionally don’t like to speak about our record as being form of a solution to make different folks look unhealthy. We additionally don’t see character as a set factor. We expect it may be developed. Elon might be on the record. In a method, I’m cheering for all 1,000 corporations and the remaining emigrate this course. There are specific CEOs that aren’t on the record for apparent causes. However I believe we additionally know why the alternative of what we’re making an attempt to establish is tremendous harmful. We need to affirm the great facet of the bell curve. We need to discover the few which can be over right here. And the few which can be over right here, we simply need to keep away from. And I believe most individuals ought to need to keep away from them. However we’re not within the enterprise actually, Meb, of figuring out them. It’s simply not our area.

Meb: No, it is sensible. By the best way, you guys, listeners, Dan has launched an ETF, the ROCI ETF, nice ticker, with our superb 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 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 keep in mind. So, inform us just a little bit the way you do that in follow, so, what number of names, how do they get weighted, when do they get rebounds, all that great things.

Dan: We now have 106 names. It’s marked midway throughout all sectors. We’re actually taking the top-weighted CEOs from our standards or our evaluation for every sector. We 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 continuously monitoring and reviewing our record all year long, and in addition continuously in search of new CEOs as we go. Analysis is continually in course of. And it’s designed, Meb, to be form of a solution to get market publicity, however solely allocate your cash to management and firms which can be pursuing this sort of conduct. As an alternative of placing your cash on the broader market, that on character, or put money into character, we expect you’ll carry out over time. And likewise, it’s affirming one thing that I believe makes the world just a little higher. And that’s form of the worth proposition as a result of we’re making an attempt to, in a method, virtually create a personality market.

Meb: What has been the preliminary reception for the way individuals are form of receiving it? And what I imply by that’s not essentially are simply folks dumping thousands and thousands of {dollars} into it however numerous instances, after we’ll launch a product or an concept, we’ll get some responses that we didn’t count on, or folks say, “Oh, fascinating,” and never essentially in a damaging but in addition in a constructive method. Or possibly they are saying this matches in another way or one thing. Like, what’s form of been a few of the conversations you’re having and the way are folks serious about this right here in 2022?

Dan: On the whole, it’s very uncommon folks don’t prefer it. It’s like this appeals to one thing virtually innate, and folks that goes…it’s virtually like a duh. After all, that is sensible. And the typical investor will say folks which can be within the business completely find it irresistible. They have an inclination to all the time ask, “How can I purchase?” And it’s a must to clarify it to your advisor and allocate parts of your present portfolio to [inaudible 00:32:34.364]. The subtle buyers are continuously it in comparison with every part else that they do. And I believe all of them just like the premise. They need to see a observe report over time, as most individuals would. However there’s an actual broad and common openness to it I’ve discovered thus far. There are all the time one or two individuals who suppose that character doesn’t matter. They cite different corporations the place our CEOs have outperformed, have accomplished rather well, and so they don’t have character. And so, that’s all the time simple to do. However, typically, it’s been very nicely obtained. And the principle factor is simply getting the phrase out that there’s now some first time. I keep in mind the primary behavior-based funding product I believe the SEC has ever authorised. And it’s a form of a brand new various. We don’t fairly know the place we match but within the SG world, however we actually suppose it’s related, and we’re hoping that folks additionally care about investing in character and see us as a method to try 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 fascinating factor is that the 4 traits discovered that we outline this character, integrity, duty, forgiveness, and compassion are additionally the traits in different cultures which can be attributed to the definition of character. And so, this isn’t simply, say, an American factor. Most societies would acknowledge that these 4 areas introduced collectively Is form of a illustration of character. So, we’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 ponder how a lot cultural distinction you see in a few of these nations. I imply, not solely might you globally, however you’ll primarily find yourself with some nation cultural ranks, I’d assume, the place some nations, simply by the best way that individuals are wired socially, that they could have decrease weights on a few of these.

Dan: See, that’s the factor that’s fascinating is the analysis reveals that telling the reality is linked to integrity, taking obligations for whenever you screw up is linked to duty, forgiveness, forgiving different folks once they screw up, compassion, empathy for others. Anytime these 4 traits form of mix does usually outline, nicely, that individual’s acquired character. I’ve talked to Fred Kiel about this. And he says, “Yeah, it’s virtually like this common rule that form of runs by us all.” These issues matter because it pertains to the way you outline character. Like I stated, the opposite issues the place you stated doesn’t have something to do together with your conduct kind, your persona kind, for instance, you’re introvert otherwise you’re extrovert, it doesn’t matter. It could possibly come up in any form of human being.

Meb: It’s fascinating as a result of there are numerous extra avenues this might go together with completely different subsets of the globe. As you consider experiencing and refining the analysis within the coming horizon as you look out, what are some areas the place you’re form of like scratching your head or pondering within the Redding woods, the place you’re like, “I ponder if we might incorporate X?” or, “I’m curious if these measures might correlate to Y?” like, what are y’all serious 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 might be higher at understanding this side of the market. I can’t assist however suppose should you go on Amazon and also you take a look at this pen, for instance, they’ll have like 20 critiques on this pen. Folks take the time to jot down their opinions. A dream of mine could be to have the ability to present a solution to begin to present a voice to folks which can be working within the trenches and to have the ability to begin offering perspective on the 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 so much and the way greatest to try 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 form of unlock that in a extra deep and sustainable method.

Meb: Yeah, how does the Glassdoor impact, something like that ever play into it? The place you, like, “Look, the CEO says all the fitting 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 may very well be a bunch of staff that simply acquired fired?

Dan: Proper. I had one state of affairs the place I simply known as Christian leaders and stated, “Hey, this CEO is simply unbelievable. He’s acquired an unbelievable character.” However then all my evaluation on the CEO reveals that he was extra like the final and some good males that put the concern of God in all subordinates. And so, you shortly realized that the best way these folks behave, CEOs behave on the golf membership shouldn’t be indicative of how they behave within the trenches. And so, the extra that we will refine our evaluation utilizing a wide range of completely different instruments, Glassdoor critiques are nice as some extent of consideration, not the purpose of consideration, the higher we’ll be at understanding. There’s numerous instruments which can be out there in the present day that haven’t been previously that may assist us acquire each an understanding of this side of corporations, not simply from the standpoint of, say, pure language processing, synthetic intelligence of conduct, of language, but in addition simply folks’s capability to freely categorical info. 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 likewise, it’ll be form of enjoyable is that it begins to point out in impact. CEOs truly suppose twice earlier than they behave poorly as a result of conduct begins to matter. That may be a neat byproduct.

Meb: Yeah, you simply begin publishing your record. That’s like the actual get the CEOs to start out behaving, publicly shaming them and saying, “Look, man, you’re backside quartile proper now. You bought to select it up.” There’s a facet enterprise for you, promoting entry to the record of all the general public boards across the nation and being like, “Yo, you guys, your CEO is considering up the joint. Possibly it is best to take into consideration one thing else.” That may be an fascinating, activist marketing campaign scenario. You’re going to get… Elliott, should you’re listening to this podcast, Carl Icahn, should you’re listening, right here’s your targets proper right here.

Dan: It could be an actual consciousness if the boards are asking the query, “Why isn’t my CEO on the record?” And if we will get that a lot traction, and we will show… 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 form of the identical relative threat returns with the upside of character over time. The extra we will get folks investing in character and exhibiting that that issues, that they do care about conduct, and that, in a method, it’s form of a vote that they consider it would outperform, the extra consideration we’ll get, I believe, with these corporations, with these board of administrators. That’s the long-term purpose. We’re orienting ourselves in the direction of making an attempt to construct a technique that will probably be right here for 100 years. We don’t need to promote it. I’ve acquired an unbelievable investor in Bridgeway Capital Administration, which is out of Houston, John Montgomery, and Tamra, the CEO there, our principal buyers. 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 certainly, 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 form of fell off his shoulders once they noticed and found this sort of what we name the character issue. That unique efficiency shouldn’t be associated to our fund in the present day, however my unique technique, solely 30% of the outperformance was associated to components, 70% John couldn’t clarify. And so, he acquired 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 common 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 a giant piece however we’re simply getting going. We’re trying to construct a group of folks that suppose character issues. We’re calling it ROC Ambassadors. The fund is connecting with different buyers that suppose it issues and need to affirm it. So, we’re all the time in search of folks,

Meb: How are you going to attach these? You guys are going to construct out a Slack channel, or is there going to be a method 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 in search of 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. Properly, yeah, I imply, it’s fascinating. I really like the concept and the idea. It’s one of many ideas that additionally, like, you need to consider in, the place you’re, like, hopeful that that is the best way it really works and never the alternative. The nice guys win, guys and gals. So, that’s fairly cool. What’s been your most memorable funding, wanting again through the years? You’ve accomplished so much, been in numerous 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 quite 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 typically 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 biggest wager. And the best consequence is having the ability to form of show that it does matter, you recognize, and it really works. That’s what I’d maintain up for instance.

Meb: All proper, nicely, listeners, all my public firm CEOs, should you’re not on their holdings record, you bought to achieve out to Dan and say, “What’s happening, man? There’s one other line of enterprise… I must amp up my quantity. The place am I going mistaken right here?”

Dan: Meb, I believe it’s essential to say, and this can be a actually cool side of this, is that Fred, he launched a consulting firm that really goes in… It’s known as KRW Worldwide. And so they go into big corporations and assist corporations develop this side. And their rivalry is it’s not that folks have or don’t have character, it’s the way you develop it over time. And so KRW, should you’re not on the record, truly is the answer to this facet of the coin. We’re solely trying to attempt to establish KRW Worldwide after which those I labored with on the analysis entrance can present an answer to get corporations form of wanting and orienting on this course. It’s actually thrilling.

Meb: Superior. Properly, look, man, the place do folks discover out in the event that they need to try the fund, what you guys are as much as? What’s the very best place?

Dan:, is the place we dwell. And you may as well discover me on LinkedIn. I welcome folks reaching out, giving me their opinion on completely different corporations or concepts. The extra we will rally collectively… If ever there was a group strategy 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 corporations are conversant in them from knowledgeable standpoint, we welcome the dialogue. I sit up for listening to from folks.

Meb: Superior, man. Dan, it’s been a blast. Thanks a lot for becoming a member of us in the present day.

Dan: Yeah, it was an honor. I actually respect it.

Meb: Podcast listeners, we’ll put up present notes to in the present day’s dialog at For those who love the present, should you hate it, shoot us suggestions at We like to learn the critiques. Please assessment us on iTunes and subscribe to the present, wherever good podcasts are discovered. Thanks for listening, buddies, and good investing.




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