Investing in character is a concept that is gaining traction among long-term investors and portfolio managers in today’s stock market. Character-focused investing, or Return on Character (ROC) investing, is an approach to stock investing that seeks to identify companies run by ethical, responsible leaders whose business practices emphasize integrity, responsibility, forgiveness, and compassion.
The idea behind ROC investing is that companies led by high-character CEOs outperform their low-character counterparts over the long term. This is based on a seven-year study by Fred Kiel and published in the Harvard Business Review, which found that high-character CEOs outperform low-character CEOs by a factor of five when measured using Return on Assets. Further, the study found that high-character CEOs had higher returns on equity, lower debt ratios, and higher employee engagement.
Dan Cooper, founder of ROC Investments, has been at the forefront of this new trend in investing. Cooper explains that ROC investing is all about measuring the character habits of CEOs and other leaders at the organizations they are investing in. To do this, Cooper and his team use a four-pillar system to measure character: integrity, responsibility, forgiveness, and compassion.
In an interview with Clint Betts, Cooper discussed his experience with character investing and how it has worked for them since March 2022. According to Cooper, their ROC portfolio has outperformed on the downside and the upside. Cooper explained that they are market cap-weighted to the most prominent American companies and, while providing the same level of risk as the Russell 1000, they can provide a cushion on the downside and a cushion on the upside for additional performance over time.
Cooper attributes much of his success to his mentor, Joe Ritchie, who he worked with in the early 2000s. According to Cooper, Ritchie was the first to allocate capital based on character. He and Ritchie went on many adventures together, and Ritchie taught Cooper the importance of investing with impact.
Cooper's team looks for evidence of character in the public domain to identify which companies to invest in. They look at the company's website, press releases, social media accounts, and other available sources to see if there are any indicators of character. If the company meets its criteria, they conduct a deeper dive into its financials and operations.
Cooper also spoke about the importance of patience in investing. He noted that character-driven investments are not quick wins but rather a long-term approach. He believes that, if done correctly, character-driven investments are a great way to impact the world and generate long-term returns positively.
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