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Why Insider 'Skin in the Game' May Beat the S&P 500 · Views from 6,230

• 0:11
  Ryan Nauman Host Adjusted for Risk: Welcome everyone to Adjusted for Risk podcast from the shores of Lake Tahoe.
• 0:16
  Ryan Nauman Host Adjusted for Risk: Over the years, many investment professionals have spent many days and years researching the different factors and drivers of equity performance to try and uncover signals that can give them a competitive advantage.
• 0:31
  Ryan Nauman Host Adjusted for Risk: My m- next guest has launched a strategy that he feels can help find top performing stocks.
• 0:38
  Ryan Nauman Host Adjusted for Risk: All right, enough from me.
• 0:40
  Ryan Nauman Host Adjusted for Risk: I've already talked enough.
• 0:42
  Ryan Nauman Host Adjusted for Risk: Let's go ahead and bring on the star of the show.
• 0:45
  Ryan Nauman Host Adjusted for Risk: I'd like to give a very warm welcome to Hiren Bhakta.
• 0:49
  Ryan Nauman Host Adjusted for Risk: Hiren is the founder and CEO Inside Ownership Index.
• 0:56
  Ryan Nauman Host Adjusted for Risk: Hiren, thank you so much for coming on the show.
• 0:58
  Ryan Nauman Host Adjusted for Risk: Really looking forward to this conversation.
• 1:01
  Ryan Nauman Host Adjusted for Risk: Love all the research you've done.
• 1:03
  Ryan Nauman Host Adjusted for Risk: Wanna dig deep into that, so looking forward to it.
• 1:06
  Ryan Nauman Host Adjusted for Risk: It's an honor to have you on.
• 1:08
  Ryan Nauman Host Adjusted for Risk: Can you please tell us a little bit more about yourself and Inside Ownership Index?
• 1:14
  Haren Bhakta Founder & CEO Inside Ownership Index: Sure.
• 1:14
  Haren Bhakta Founder & CEO Inside Ownership Index: A little about myself.
• 1:15
  Haren Bhakta Founder & CEO Inside Ownership Index: I started out in the investment industry in 2010 at Merrill Lynch, going through the wealth management program.
• 1:23
  Haren Bhakta Founder & CEO Inside Ownership Index: Went to Morgan Stanley after about two and a half years in 2000- in 2012.
• 1:29
  Haren Bhakta Founder & CEO Inside Ownership Index: Spent about five and a half years at Morgan Stanley.
• 1:31
  Haren Bhakta Founder & CEO Inside Ownership Index: In 2017, I left Morgan Stanley to start my own investment practice, and I've been doing that since.
• 1:38
  Haren Bhakta Founder & CEO Inside Ownership Index: In 2024, I created the Inside Ownership Index, and I, I think I created the idea while sitting at the Berkshire annual meeting.
• 1:52
  Haren Bhakta Founder & CEO Inside Ownership Index: So I'm a huge Warren Buffett fan.
• 1:54
  Haren Bhakta Founder & CEO Inside Ownership Index: I bought a lot of Berkshire for myself and for my clients because of that belief and trust in Warren Buffett.
• 2:00
  Haren Bhakta Founder & CEO Inside Ownership Index: So I've read everything he's put out, listened to everything he's ever said.
• 2:04
  Haren Bhakta Founder & CEO Inside Ownership Index: And I was sitting at the meeting in 2024, in the back of my mind, afraid of what am I gonna do with Berkshire when he dies.
• 2:15
  Haren Bhakta Founder & CEO Inside Ownership Index: And this was the first meeting Charlie Munger wasn't there because he had passed away about six, five months earlier.
• 2:21
  Haren Bhakta Founder & CEO Inside Ownership Index: And so I'm sitting there afraid, and at some point in the meeting it hit me that the S&P 500 will actually be buying more Berkshire Hathaway when Warren Buffett dies.
• 2:35
  Haren Bhakta Founder & CEO Inside Ownership Index: A lot of people don't know that.
• 2:36
  Haren Bhakta Founder & CEO Inside Ownership Index: And the, the reason for that is the S&P is what's called free float adjusted market cap weighted.
• 2:42
  Haren Bhakta Founder & CEO Inside Ownership Index: So they don't count his shares because he's a controlling shareholder.
• 2:46
  Haren Bhakta Founder & CEO Inside Ownership Index: When he dies, he's not gonna be a con-controlling shareholder anymore.
• 2:51
  Haren Bhakta Founder & CEO Inside Ownership Index: Those shares become free floating.
• 2:53
  Haren Bhakta Founder & CEO Inside Ownership Index: So I just thought, "Who would want more Berkshire Hathaway without Warren Buffett?
• 2:57
  Haren Bhakta Founder & CEO Inside Ownership Index: Who would want more Tesla without Elon Musk?"
• 2:59
  Haren Bhakta Founder & CEO Inside Ownership Index: 'Cause they don't count the 20% of Tesla that he owns.
• 3:03
  Haren Bhakta Founder & CEO Inside Ownership Index: And, same thing with Meta.
• 3:04
  Haren Bhakta Founder & CEO Inside Ownership Index: Who wants more Meta without Mark Zuckerberg?
• 3:06
  Haren Bhakta Founder & CEO Inside Ownership Index: And I just thought, "Who...
• 3:08
  Haren Bhakta Founder & CEO Inside Ownership Index: why is the S&P on the opposite side of the table of these super value-creating CEOs?"
• 3:15
  Haren Bhakta Founder & CEO Inside Ownership Index: We should wanna be on the same side of the table.
• 3:17
  Haren Bhakta Founder & CEO Inside Ownership Index: So I came home from Omaha and launched...
• 3:20
  Haren Bhakta Founder & CEO Inside Ownership Index: figured out how to get this ownership data first, and nobody had it.
• 3:23
  Haren Bhakta Founder & CEO Inside Ownership Index: Nobody had CapIQ, Bloomberg FactSet.
• 3:28
  Haren Bhakta Founder & CEO Inside Ownership Index: None of these data providers had the ownership.
• 3:30
  Haren Bhakta Founder & CEO Inside Ownership Index: So I had to go manually through all, every single proxy filing of the S&P 500 constituents going back 20 years.
• 3:39
  Haren Bhakta Founder & CEO Inside Ownership Index: So I'm talking about 20,000, more than 20,000 different proxy filings manually.
• 3:44
  Haren Bhakta Founder & CEO Inside Ownership Index: And the, the proxy filings are quite complicated in a sense that AI can't easily just pull out the numbers.
• 3:53
  Haren Bhakta Founder & CEO Inside Ownership Index: At least it couldn't in 2024.
• 3:55
  Haren Bhakta Founder & CEO Inside Ownership Index: So I'm currently the only one with, with the data aggregated.
• 3:59
  Haren Bhakta Founder & CEO Inside Ownership Index: The data's there in the proxies, it's just n- nobody has it.
• 4:02
  Haren Bhakta Founder & CEO Inside Ownership Index: So essentially, the Inside Ownership Index is a, a passive index that tracks the performance of shares owned by insiders versus the S&P is the reverse of that.
• 4:17
  Haren Bhakta Founder & CEO Inside Ownership Index: It's, the S&P is what's called the free float adjusted market cap.
• 4:20
  Haren Bhakta Founder & CEO Inside Ownership Index: So it's counting all the shares that's essentially not held by controlling shareholders, and I'm counting the shares that are actually held by controlling shareholders.
• 4:32
  Haren Bhakta Founder & CEO Inside Ownership Index: It's essentially, as my T-shirt says, skin in the game.
• 4:35
  Haren Bhakta Founder & CEO Inside Ownership Index: Says, it's the skin in the game index
• 4:39
  Ryan: Love that, Heron.
• 4:40
  Ryan: And that's fantastic.
• 4:41
  Ryan: I don't...
• 4:42
  Ryan: Like you said, I don't think a lot of people realize that about the S&P and being free float.
• 4:46
  Ryan: And yet I'm, doing research here before we jumped on, it is really interesting.
• 4:53
  Ryan: Yeah when, Warren passes along, it's inter- S&P is gonna be buying up Berkshire, but then at the same time, it's do you really wanna own it?
• 5:01
  Ryan: There's so much uncertainty.
• 5:04
  Ryan: Yes, they have a succession plan in place, but still a lot of uncertainty there.
• 5:09
  Ryan: So it's interesting.
• 5:10
  Ryan: Yes,
• 5:10
  Haren Bhakta: Right
• 5:11
  Ryan: will go along with the S&P and, buy whatever they're adding to the index, but it raises questions, and
• 5:17
  Haren Bhakta: Yeah.
• 5:17
  Haren Bhakta: What I find in my research is that a brilliant CEO, I think about half the time they could find a good replacement.
• 5:29
  Haren Bhakta: And one, one example of that is Apple.
• 5:31
  Haren Bhakta: So Steve Jobs found a good replacement in Tim Cook.
• 5:34
  Haren Bhakta: But what I've...
• 5:34
  Haren Bhakta: I can't find a single scenario where the replacement could find a good replacement.
• 5:43
  Haren Bhakta: And because by then the, the company gets bureaucratic, and to rise up the ranks in an organization, it becomes very political, very suit-wearing type person, and they're good at maybe sales or talking, but they're not good at innovation,
• 6:01
  Haren Bhakta: which is what re- what's really requi- required in a technology company to take the company to the next level, especially in a changing world.
• 6:11
  Haren Bhakta: And we have an extremely fast-paced changing world right now with AI, right?
• 6:17
  Haren Bhakta: So you...
• 6:18
  Haren Bhakta: We don't see Apple participating at all in this next future.
• 6:22
  Haren Bhakta: And, when the cellphone changes, and it hasn't changed in, in, 20 years or almost 20 years now, s- but when the world does change, y- I don't see Apple participating 'cause they're not investing any capital into the future
• 6:37
  Haren Bhakta: at all.
• 6:38
  Haren Bhakta: And I...
• 6:39
  Haren Bhakta: and it's probably the right decision because they don't have the talent.
• 6:42
  Haren Bhakta: Now, we have a Mark Zuckerberg at Meta making huge bets.
• 6:46
  Haren Bhakta: We have Amazon with Jeff Bezos.
• 6:48
  Haren Bhakta: Jeff Bezos is not the CEO, but he is the chairman.
• 6:51
  Haren Bhakta: He is overseeing strategy.
• 6:53
  Haren Bhakta: When you have people capable of making these big bets you want them to.
• 6:58
  Haren Bhakta: And in, in Apple's case, you don't have that.
• 7:01
  Haren Bhakta: My research finds that the world going back, 1,000 years has always changed by the m- minority few.
• 7:12
  Haren Bhakta: And to capture more of that by using an inside ownership weighted index you get a more concentrated version of the S&P and bigger bets on the biggest innovators
• 7:28
  Ryan: Yeah, I'm a firm believer in that too, Harry.
• 7:30
  Ryan: If you are committed to something, conviction in it, right?
• 7:35
  Ryan: Go all in versus...
• 7:37
  Ryan: in some cases for investors, maybe going all in on Bitcoin maybe is not the best thing to do.
• 7:43
  Ryan: But there's a lot of things.
• 7:44
  Ryan: If you are convicted, you have conviction in a certain strategy, investment thesis or something go all in on it and show that you're committed to it, and that, so it's interesting that you're talking about on the corporate side.
• 7:59
  Ryan: So it.
• 8:01
  Ryan: Great start here.
• 8:02
  Ryan: So why does inside ownership and really shareholder alignment matter when it comes to investing?
• 8:10
  Haren Bhakta: Shareholder alignment is huge.
• 8:12
  Haren Bhakta: What you want is leaders of the organization to think like shareholders and to be aligned with shareholders.
• 8:20
  Haren Bhakta: Otherwise, you get scenarios where insiders have perverse incentives, right?
• 8:27
  Haren Bhakta: Where they are not aligned with shareholders, they become agents for the corporation and, more concerned with their own base salaries and/or board fees versus, versus actual- actually creating shareholder value.
• 8:43
  Haren Bhakta: One example I have that, of that right now, playing out right now is eBay and GameStop.
• 8:49
  Haren Bhakta: So Ryan Cohen, the CEO of GameStop, has placed a bid, a takeover bid for eBay.
• 8:56
  Haren Bhakta: Now, I'm not an eBay shareholder, so I can't tell you whether it's a good deal for eBay.
• 9:02
  Haren Bhakta: But what I can tell you is that eBay's board cannot objectively decide whether it's good for shareholders.
• 9:10
  Haren Bhakta: You know what I mean?
• 9:11
  Haren Bhakta: Because they're not shareholders.
• 9:13
  Haren Bhakta: They're getting $300,000 in board fees every year, and the CEO is getting $30 million in compensation who's never purchased any stock himself.
• 9:22
  Haren Bhakta: So you have essentially people protecting their own job deciding whether a deal is good for shareholders or not, and it is just creating a skin in the game problem where you get these corporations with no share ownership themselves
• 9:43
  Haren Bhakta: deciding what's good for owners
• 9:47
  Ryan: Yeah, that's really interesting.
• 9:48
  Ryan: And I like to think too, Heron, on the investment side, very rarely...
• 9:53
  Ryan: stock picking's really hard.
• 9:55
  Ryan: I'm not very good at it, so I focus on the professionals.
• 9:58
  Ryan: I'll pay, points or whatever, how much it is to have professionals manage the money.
• 10:04
  Ryan: But when I'm doing that, one of my criteria is I want these managers, portfolio managers, to eat their own cooking or have their skin in the game, as you would say.
• 10:14
  Ryan: I want their own skin in the game.
• 10:16
  Ryan: I don't want to invest in a portfolio manager who doesn't invest in their own strategy,
• 10:22
  Haren Bhakta: Exactly.
• 10:23
  Haren Bhakta: Yeah.
• 10:24
  Haren Bhakta: Yeah very exactly similar and my, one of my favorite investors is named Nick Sleep out of the UK.
• 10:32
  Haren Bhakta: He's very underrated.
• 10:33
  Haren Bhakta: A lot of people don't know about him.
• 10:35
  Haren Bhakta: He created enormous wealth for investors, and he eventually shut down his fund because he made so much money and he told his investors that, "Hey, you don't need to pay me fees anymore.
• 10:48
  Haren Bhakta: Just buy these three stocks.
• 10:49
  Haren Bhakta: That's what I'm gonna do."
• 10:50
  Haren Bhakta: So he had this fabulous run and he said, "Hey..."
• 10:54
  Haren Bhakta: I think he shut down in 2014, and he said, "Hey, just buy these three stocks 'cause that's what I'm gonna own."
• 10:59
  Haren Bhakta: He bought Costco, Amazon, and Berkshire Hathaway.
• 11:04
  Haren Bhakta: And he- his line is that the best investors are not investors at all.
• 11:11
  Haren Bhakta: They're entrepreneurs that never sold, which is true.
• 11:15
  Haren Bhakta: Now we l- look at the best investors.
• 11:17
  Haren Bhakta: You got Jeff Bezos, Mark Zuckerberg Warren Buffett.
• 11:21
  Haren Bhakta: These aren't investors.
• 11:22
  Haren Bhakta: Essentially, they're entrepreneurs that never sold their stock.
• 11:26
  Haren Bhakta: So what we should be doing is outsourcing our investing to these greatest investors, and by doing that an inside ownership w- index basically does that for you in a systematic way
• 11:41
  Ryan: Yeah, exactly.
• 11:42
  Ryan: I, yeah, I think it's very important to invest in people that, like you said, they have skin in the game too.
• 11:48
  Ryan: You wanna invest
• 11:50
  Haren Bhakta: Yeah.
• 11:50
  Haren Bhakta: Sa- Sam Hinkie, s- the old GM of 76ers he had a line that the people are power law, and the best ones change everything.
• 12:02
  Haren Bhakta: And the, and society has always worked that way.
• 12:05
  Haren Bhakta: The best people are power law, and the best ones do change everything.
• 12:10
  Haren Bhakta: Look at the last 2,000 years.
• 12:13
  Haren Bhakta: We've...
• 12:14
  Haren Bhakta: Society has moved by the f- the, the small number of individuals have created enormous value or y- m- maybe more than 1,000 years ago is more about armies.
• 12:27
  Haren Bhakta: But today, you can classify a organization or corporation as a, a, as its own little army, right?
• 12:35
  Haren Bhakta: And, it's always been the individual who has taken, who people have rallied around that individual and created enormous value
• 12:48
  Ryan: Yeah, a- and speaking of power law, I'm glad you brought that up, Erin, because I've done some research, h- and it's clear power law is very evident in today's market.
• 12:59
  Ryan: For not only for recent years with the Mag Seven stocks, and even go back in time, power law, it's where very few names, 10 names, drive the performance of the overall market.
• 13:14
  Ryan: So same with people too
• 13:16
  Haren Bhakta: Absolutely.
• 13:17
  Haren Bhakta: There was this s- study done by a Arizona State University professor who looked at all US stocks over 100 years.
• 13:27
  Haren Bhakta: So we're talking about a century of data, looking at every single stock in America.
• 13:32
  Haren Bhakta: What he discovered was 4% of all stocks delivered all the wealth creation, while the other 96% matched US Treasury bills.
• 13:43
  Haren Bhakta: So it's not even just a recent phenomenon.
• 13:47
  Haren Bhakta: The stock market has always been a small number of stocks carrying the entire performance of the indices.
• 13:56
  Haren Bhakta: So it's always been power law driven.
• 13:58
  Haren Bhakta: But what, where academia got it half right is that the leaders of organizations have exhibit even bigger power laws.
• 14:08
  Haren Bhakta: There's a small number of leaders that create enormous wealth, and we can look at that today with Elon Musk and Jensen and Jeff Bezos and Z- and Mark Zuckerberg, right?
• 14:19
  Haren Bhakta: So these few exceptional leaders create enormous value while most of society and m- most of these companies don't deliver enormous shareholder wealth.
• 14:31
  Haren Bhakta: And so by investing in these exceptional leaders you could raise your performance.
• 14:37
  Haren Bhakta: And I looked at every hundred bagger I could find.
• 14:41
  Haren Bhakta: A hundred bagger is a stock that delivers 100 times your money.
• 14:46
  Haren Bhakta: So you put in $10,000, it turns into over a million.
• 14:49
  Haren Bhakta: Between the years 2000 to 2025, I found about 21, and only two exceptions.
• 14:59
  Haren Bhakta: Every single one of those 21 except for two, Apple and FICO Isaac, had ownership above 5% at the start before it went on that, that hundred bagger return journey.
• 15:15
  Haren Bhakta: So Apple surprisingly is kind of an asterisk.
• 15:19
  Haren Bhakta: So Steve Jobs didn't own a huge part of Apple despite being a founder, and is-- the reason for that is he got kicked out of Apple and then came back.
• 15:29
  Haren Bhakta: So he had sold out of Apple I, I believe two times throughout his career, he had sold out of Apple and got back in.
• 15:36
  Haren Bhakta: The f- the s- the last time is because he was kicked out, so he, sold his whole entire stake of Apple.
• 15:42
  Haren Bhakta: And so and the other exception was FICO Isaac, but all the other ones had ownership above 5%, and very often more than that.
• 15:52
  Haren Bhakta: And there was no other commonality I could find.
• 15:55
  Haren Bhakta: They were all in diverse different industries.
• 15:57
  Haren Bhakta: It wasn't necessarily the CEO that, that owned the stock.
• 16:01
  Haren Bhakta: It wasn't necessarily a founder.
• 16:03
  Haren Bhakta: Tractor Supply was one company that, that achieved that hundred bagger return, and that was an old company.
• 16:10
  Haren Bhakta: Didn't have a founder but it had ownership.
• 16:14
  Haren Bhakta: Monster Beverage, again, that wasn't founder-led, but it was people with skin in the game.
• 16:21
  Haren Bhakta: So it doesn't have to be a founder, essentially.
• 16:23
  Haren Bhakta: Warren Buffett is not the technically the founder of Berkshire.
• 16:26
  Haren Bhakta: Howard Schultz was not the founder of Starbucks.
• 16:31
  Haren Bhakta: Yeah.
• 16:32
  Haren Bhakta: And, even surprisingly, Elon Musk is technically not the founder of Tesla.
• 16:39
  Haren Bhakta: Yeah, a lot of people don't know that.
• 16:40
  Haren Bhakta: So he a- he acquired Tesla or made a huge investment into Tesla early on.
• 16:47
  Haren Bhakta: Yeah, he was early on, but he's technically not the founder, although he's probably labeled the founder, just like Warren Buffett is now labeled the founder of Berkshire, and rightfully they, he created the value of modern day Berkshire, but
• 17:01
  Haren Bhakta: technically speaking, he's not the original idea or he didn't create the, the entity Berkshire
• 17:10
  Ryan: Yeah, that's interesting because I didn't know that.
• 17:11
  Ryan: I just assumed that Musk was a founder, and same with Warren.
• 17:15
  Ryan: So interesting there.
• 17:19
  Ryan: Also, who would've thought if you said, asked somebody 2,100 baggers over the past, 20 years or so when you started this, who would've thought Tractor Supply would've named Tractor Supply as one of them?
• 17:34
  Haren Bhakta: Yeah, yeah.
• 17:35
  Haren Bhakta: Tractor Supply, Universal, w- a company called Universal Insurance.
• 17:40
  Haren Bhakta: Yeah, again, 21 of them.
• 17:42
  Haren Bhakta: Netflix, Nvidia, Apple g-
• 17:45
  Ryan: I think people would've gone there.
• 17:47
  Haren Bhakta: Yeah.
• 17:48
  Ryan: Supply I don't think would've
• 17:51
  Haren Bhakta: O'Reilly's another one, the auto parts store.
• 17:53
  Haren Bhakta: O'Reilly's, another hundred bagger.
• 17:55
  Haren Bhakta: Again, O'Reilly's wasn't founder led I don't believe, but it was family operated.
• 18:00
  Haren Bhakta: So what I find is that w- it takes an owner/operator to have that extreme outlier type returns, and the reason for that is it's a cultural thing.
• 18:12
  Haren Bhakta: So if you d- have no ownership on a board or at the executive level, you are judged quarterly.
• 18:20
  Haren Bhakta: And when you're judged quarterly, you're gonna think quarterly, and to have these extreme returns, you have to do things that make your company look less profitable now in order to achieve these enormous returns.
• 18:37
  Haren Bhakta: So for example Walmart and Costco, they purposely suppressed margins.
• 18:44
  Haren Bhakta: They wanna offer, and Amazon is too, they wanna offer low prices, right?
• 18:50
  Haren Bhakta: They could raise prices and probably increase profits over the next quarter or year, but that would damage the long-term aspect of their business in, in providing low prices.
• 19:02
  Haren Bhakta: So when you have no ownership and you reward CEOs for quarterly performance, they get incentivized to perform quarterly.
• 19:14
  Haren Bhakta: But to create these enormous returns you can't think quarterly.
• 19:17
  Haren Bhakta: Jeff Bezos thought in decades, right?
• 19:19
  Haren Bhakta: He was perfectly fine failing in small projects that had maybe a high chance of failure, but if successful, had these enormous runways.
• 19:32
  Haren Bhakta: So one example, a couple examples is he failed with the Fire Phone, but through, through trial and error, they came up with AWS, right?
• 19:41
  Haren Bhakta: Huge a world-class company now.
• 19:44
  Haren Bhakta: Jeff Bezos created essentially not just one world-class company, he created two, Amazon retail store, or web store, and AWS.
• 19:56
  Haren Bhakta: These individuals are able to create enormous value.
• 20:01
  Haren Bhakta: We should want to essentially ride their coattails, and when they're gone not be invested in those companies as much, or if at all.
• 20:12
  Ryan: And e- exactly like you said too, they're thinking long-term.
• 20:15
  Ryan: They're not just thinking, "Oh, we gotta meet our objectives quarter to quarter."
• 20:20
  Ryan: They're thinking long-term, just like I keep, going back to if I'm going to invest in a portfolio manager, three quar- three months?
• 20:31
  Ryan: Yeah, that doesn't really do it for me.
• 20:33
  Ryan: I want a portfolio manager that has been very successful over 10 years, right?
• 20:40
  Haren Bhakta: Exactly.
• 20:41
  Haren Bhakta: Exactly.
• 20:42
  Haren Bhakta: Yeah.
• 20:42
  Haren Bhakta: And so the, the other importance of skin in the game is, like Jeff Bezos said, basically, if you want to be successful, you have to be willing to be misunderstood.
• 20:56
  Haren Bhakta: And if you're a CEO or board with no ownership, they don't have the luxury to be misunderstood.
• 21:05
  Haren Bhakta: They don't have the luxury of doing things now that are unexplainable or, people or shareholders or Wall Street doesn't understand now.
• 21:18
  Haren Bhakta: So they don't have the luxury of doing things where they can be proven right later.
• 21:23
  Haren Bhakta: They have to essentially innovate by consensus, and consensus and committees do not innovate
• 21:33
  Ryan: Yeah, that's a very good point.
• 21:34
  Ryan: So during your research, when you looked at all these 100 bag- baggers, the 21 of them from, over the past, that time period that you were looking at, was there a cutoff, like a percentage when you're talking about
• 21:47
  Ryan: ownership?
• 21:48
  Ryan: Was it like 10% ownership, 20%?
• 21:51
  Haren Bhakta: Well, 5% was, 5% was the cutoff that I looked at, and 19 of those 21 had at least 5%, and very often more Right at the start.
• 22:06
  Haren Bhakta: So they didn't all finish with that kind of ownership.
• 22:08
  Haren Bhakta: So for example, NVIDIA now the...
• 22:11
  Haren Bhakta: What you find is a lot of the founders or owners do sell along the way, and it's not because that they're bearish.
• 22:21
  Haren Bhakta: It's because that their 99% of their net worth is often tied to this company, and they're going to bed thinking about it, waking up thinking about it.
• 22:30
  Haren Bhakta: So they're taking liquidity along the way.
• 22:33
  Haren Bhakta: So rightfully so the...
• 22:34
  Haren Bhakta: Yeah.
• 22:34
  Haren Bhakta: So what-- Jeff Bezos has been selling Amazon for 20 years, but that, that's not because he's bearish.
• 22:40
  Haren Bhakta: He's, all his net worth is tied up into the company.
• 22:43
  Haren Bhakta: And which actually brings me to my favorite analogy is that what I call a hired CEO, I call I call a hired CEO a zoo animal.
• 22:54
  Haren Bhakta: Now, a zoo animal gets fed every day, whether it successfully hunts or not, right?
• 22:58
  Haren Bhakta: A zoo animal or a hired CEO gets their base salary, quarterly bonus and very often a golden parachute.
• 23:06
  Haren Bhakta: I like to call a owner/operator a wild lion.
• 23:10
  Haren Bhakta: A wild lion is trained to survive.
• 23:11
  Haren Bhakta: These CEOs have already proven their ability to create value in the world, so they're trained to survive.
• 23:21
  Haren Bhakta: And when they don't successfully hunt, they feel the pain, and that's what you're looking for in a CEO.
• 23:26
  Haren Bhakta: You want them to feel the pain of failure, and you want their net worth to be directly exposed to that.
• 23:34
  Haren Bhakta: And very often, these owner/operators are taking the lowest salaries.
• 23:38
  Haren Bhakta: It's the hired CEOs that are taking the large base salaries, right?
• 23:43
  Haren Bhakta: So they don't often feel that pain.
• 23:46
  Haren Bhakta: And innovation comes from feedback loops, trial and error, and it's-- This is exactly why it's very hard to innovate through committee.
• 23:56
  Haren Bhakta: You don't get those feedback loops, and they don't feel the pain of mistakes initially.
• 24:03
  Haren Bhakta: It's suppressed.
• 24:05
  Haren Bhakta: And yeah, the, the...
• 24:06
  Haren Bhakta: One of my favorite books is How Innovation Works and by Matt Ridley.
• 24:10
  Haren Bhakta: He talks a lot about how innovation really works, and it works it through trial and error and not through decentralized decision-making.
• 24:20
  Haren Bhakta: Or I'm sorry, not through centralized decision-making.
• 24:23
  Haren Bhakta: It comes from des- decentralization, where the people working on the problem have actual decision-making power to to pivot.
• 24:33
  Haren Bhakta: And what you get in non-skin in the game companies is centralization of decision-making from the top.
• 24:41
  Haren Bhakta: And that's not how innovation works
• 24:45
  Ryan: And he goes right back to skin in the game.
• 24:47
  Ryan: And it's a care factor too.
• 24:50
  Ryan: Like you said, that, zoo lion, yeah, they probably, they, the care factor is not there as a hired CEO more.
• 24:58
  Ryan: Maybe they just have more of a figurehead CEO versus that, lion, that wild lion who's got that care factor.
• 25:06
  Ryan: They really care that they're gonna eat, and they gotta go hunt, and A very important part is caring,
• 25:12
  Haren Bhakta: Exactly.
• 25:13
  Haren Bhakta: Yeah.
• 25:13
  Haren Bhakta: So I did, so I, you heard me talk about the 21 100 baggers, which, 19 of them all had ownership.
• 25:20
  Haren Bhakta: I also studied the five largest value destroyers of the S&P over the last five years, and all five had very low ownership.
• 25:34
  Haren Bhakta: So not only are we getting more outlier returns from high ownership companies, we're also getting the biggest value destroyers of the S&P having no or very low ownership.
• 25:47
  Haren Bhakta: So number one was PayPal, the biggest value destroyer between 2001 and 2026.
• 25:54
  Haren Bhakta: The second biggest value destroyer destroyer was Adobe.
• 25:58
  Haren Bhakta: Again, no ownership.
• 25:59
  Haren Bhakta Inside Ownership Index: Disney was number three.
• 26:01
  Haren Bhakta Inside Ownership Index: Comcast I believe Nike was number five or number six, I can't remember.
• 26:05
  Haren Bhakta Inside Ownership Index: But the, the point is that every single one had low ownership.
• 26:07
  Haren Bhakta Inside Ownership Index: Nike, founded by Phil Knight, world-class brand, right?
• 26:13
  Haren Bhakta Inside Ownership Index: Down 70% over the last five years.
• 26:17
  Haren Bhakta Inside Ownership Index: We're talking about a world-class brand of Nike and the biggest bull market in stock market history, and yet the stock is down 70%.
• 26:27
  Haren Bhakta Inside Ownership Index: This is because Phil Knight is no longer part of the company.
• 26:31
  Haren Bhakta Inside Ownership Index: It's remove from a company who made it great and you removed what made it great
• 26:39
  Ryan: Yeah.
• 26:40
  Ryan: That's interesting because, with Nike you do think that...
• 26:45
  Ryan: nike's all over the place, but it doesn't mean that it's performing well or it's stock.
• 26:50
  Ryan: And
• 26:50
  Haren Bhakta: Exactly.
• 26:50
  Ryan: Knight is
• 26:52
  Haren Bhakta: 70% down in the biggest bull market in history.
• 26:54
  Ryan: that care factor
• 26:55
  Haren Bhakta: Exactly.
• 26:56
  Haren Bhakta: Yeah.
• 26:57
  Haren Bhakta: Someone going to bed thinking about the company, waking up thinking about the company.
• 27:01
  Haren Bhakta: And the co- it's not a fast-moving thing when these founders retire.
• 27:05
  Haren Bhakta: It's that the culture slowly erodes And they start thinking about the wrong things, and that's what it is
• 27:15
  Ryan: It's interesting.
• 27:15
  Ryan: So there is a high correlation or a correlation between high ownership companies and strong culture then
• 27:23
  Haren Bhakta: Absolutely.
• 27:24
  Haren Bhakta: And, that actually brings me to the, the title of your show, Zephyr.
• 27:28
  Haren Bhakta: We went back 20 years.
• 27:29
  Haren Bhakta: So the index itself has been live for two years now.
• 27:32
  Haren Bhakta: The ETF that tracks the index only launched about a month and a half ago.
• 27:37
  Haren Bhakta: But the index itself, and we've been managing portfolios according to the index for almost two years now.
• 27:43
  Haren Bhakta: But what we looked at is how it's performed in volatility periods.
• 27:50
  Haren Bhakta: So we went back 20 years.
• 27:52
  Haren Bhakta: What we found is it is more concentrated, so it, it does have more volatility.
• 27:58
  Haren Bhakta: However, in 2008 and 2020, the two global catastrophic events we've had over the last 20 years.
• 28:08
  Haren Bhakta: So these were not just volatility periods like 2022 or 2025 or 2018.
• 28:14
  Haren Bhakta: These were actual global catastrophic events.
• 28:18
  Haren Bhakta: And S&P 500 went down more than these high ownership companies collectively.
• 28:25
  Haren Bhakta: So while we could use academic risk models to say, one is more volatile than the other, but when you needed a safety the most in these two global catastrophic events, what we found was that the S&P fared worse
• 28:45
  Haren Bhakta: And that's because high ownership companies are better run.
• 28:50
  Haren Bhakta: They have better management, they have better balance sheets, they are less levered.
• 28:56
  Haren Bhakta: They also have access to capital when nobody else does.
• 29:03
  Haren Bhakta: So they have access to more capital when the world is going through its l-liquidity crunch, like in 2008.
• 29:09
  Haren Bhakta: We could, again, we could use volatility as a measure, but what I find is the Warren Buffett principle is, what gives you a, a chance of losing actual capital or permanent capital, permanent loss of capital versus just gyrations
• 29:27
  Haren Bhakta: in the market.
• 29:29
  Haren Bhakta: And investing in these high ownership companies I, you, I believe you, you have less chance of losing permanent loss of capital.
• 29:37
  Haren Bhakta: And the best example I have is Silicon Valley Bank.
• 29:41
  Haren Bhakta: Silicon Valley Bank was in the S&P 500, so if you owned the S&P 500 in 2023, you had exposure to Silicon Valley Bank.
• 29:50
  Haren Bhakta: And if you look at the proxy filing, which I did in 2023 ownership was so low that it was represented by an asterisk.
• 30:00
  Haren Bhakta: So insiders own nothing.
• 30:02
  Haren Bhakta: So what you get is a company that will leverage up the company to hit quarterly bonuses without thinking about the exposure of failure.
• 30:15
  Haren Bhakta: And when you have a true owner, they're thinking about failure or catastrophic loss first, and then optimi- optimizing performance secondary.
• 30:28
  Haren Bhakta: But, when you have a company like Silicon Valley Bank with no owners, they thought, "Let's hit it out of the park first," and, not worrying about surviving first
• 30:41
  Ryan: Yeah, that's fantastic.
• 30:42
  Ryan: I love that you brought up about just losing money, and one of my favorite quotes from Warren is, I believe, r- his rules.
• 30:50
  Ryan: Number one, don't lose
• 30:51
  Haren Bhakta: Don't lose my number two.
• 30:52
  Haren Bhakta: Don't forget rule number one.
• 30:54
  Haren Bhakta: Exactly.
• 30:55
  Ryan: that.
• 30:55
  Ryan: Find...
• 30:55
  Ryan: You brought up volatility.
• 30:58
  Ryan: often find in investing we, we focus on standard deviation and volatility.
• 31:03
  Ryan: In recent years, it's shifted now in terms of risk to just capital preservation.
• 31:09
  Ryan: To me, that's the real risk, Erin, is losing money,
• 31:12
  Haren Bhakta: Exactly
• 31:13
  Ryan: the upside volatility you want, and it goes back to what Warren was saying, what you were just saying.
• 31:18
  Ryan: Losing value, losing money is really the risk that you want to mitigate,
• 31:23
  Haren Bhakta: Exactly.
• 31:24
  Haren Bhakta: As Nassim Taleb says, "Never cross a river that's on average four feet deep."
• 31:31
  Haren Bhakta: So in order to achieve these average returns, which, can be high, you must first survive.
• 31:38
  Haren Bhakta: So that part of the, the S&P that was in Silicon Valley Bank, that, that part of the money will never earn the average ra- return because it went to zero.
• 31:48
  Haren Bhakta: So what you want is to avoid losses.
• 31:51
  Haren Bhakta: And like I mentioned the S&P's biggest value destroyers were these no ownership companies, and the biggest outliers were high ownership companies.
• 32:00
  Haren Bhakta: And that's because these, when you have leaders that own meaningful stakes, they do treat the company better
• 32:09
  Ryan: Yeah.
• 32:10
  Ryan: And it goes back to while you're talking it brings me back to trust too.
• 32:14
  Ryan: You talked about these high ownership companies, they're able to access capital markets even when capital markets are dry
• 32:23
  Haren Bhakta: Exactly
• 32:24
  Ryan: lending money.
• 32:26
  Ryan: it trust?
• 32:27
  Ryan: This industry's built huge on trust.
• 32:29
  Ryan: If there wasn't trust in wealth management, there wouldn't be wealth management.
• 32:34
  Ryan: do you think that's wh- even though you have Elon Musk and these big names that are very eccentric, they're out there.
• 32:41
  Ryan: Is it because the capital markets trust these, the owners and they're
• 32:48
  Haren Bhakta: Yeah.
• 32:48
  Ryan: We trust them, let them go"?
• 32:50
  Haren Bhakta: they're proven successful leader.
• 32:52
  Haren Bhakta: They're proven to be able to create value in this world, right?
• 32:57
  Haren Bhakta: So yeah, they're more highly trusted, right?
• 33:01
  Haren Bhakta: W- you would rather give capital to Jeff Bezos, Elon Musk, Warren Buffett than some guy you never heard of, right?
• 33:11
  Haren Bhakta: Can you really name the CEO of Micron?
• 33:14
  Haren Bhakta: Yeah, Micron is a trillion-dollar company today, but who is the CEO?
• 33:17
  Haren Bhakta: I have no idea.
• 33:19
  Haren Bhakta: I don't think most people do.
• 33:21
  Haren Bhakta: Right now, ExxonMobil is a top 10 company in the S&P 500.
• 33:26
  Haren Bhakta: Can you name the CEO?
• 33:28
  Haren Bhakta: I have no idea who that is, right?
• 33:31
  Haren Bhakta: In the Inside Ownership Index, you can name every CEO in the top 10 of the index.
• 33:37
  Haren Bhakta: But, m- you get these people who have really no ownership, no significant past performance controlling these enormous trillion-dollar companies who are essentially people we don't know.
• 33:53
  Haren Bhakta: So it, you know-
• 33:56
  Ryan: That, that's a really good point.
• 33:57
  Ryan: So let's talk to you.
• 33:59
  Ryan: As a shareholder, you brought it up, you get the chance to vote on corporate, whether it's CEO or, whatever through ownership.
• 34:10
  Ryan: But now you have these huge asset managers, BlackRock, Vanguard, these passive market cap-weighted index funds that control the voting through proxies.
• 34:23
  Ryan: Is that gonna be an issue there when you have these huge passive market cap-weighted index funds?
• 34:29
  Ryan: Is that a hidden problem?
• 34:31
  Haren Bhakta: Yes, absolutely.
• 34:32
  Haren Bhakta: I see that as a huge systemic skin in the game problem.
• 34:36
  Haren Bhakta: You have more and more of these trillion-dollar companies or hundred billion dollar companies controlled by a board and executives that maybe own no shares or purchase no shares themselves.
• 34:49
  Haren Bhakta: So what you get is perverse incentives, right?
• 34:54
  Haren Bhakta: You get non-owners deciding what's good for owners, and they have these enormous balance sheets to fund their own lifestyle.
• 35:07
  Haren Bhakta: And, it, it's a huge problem.
• 35:09
  Haren Bhakta: So I think I mentioned this earlier with Ryan Cohen and eBay.
• 35:13
  Haren Bhakta: I think that's a, a big problem in that in the past, if management was terrible or mediocre, they could be voted out, and that's not the case anymore.
• 35:27
  Haren Bhakta: So Warren Buffett actually talked a lot about this, the biggest value destroyers in Warren Buffett's eyes.
• 35:33
  Haren Bhakta: He said this in 1997, that the biggest value destroyers are mediocre CEOs because a terrible CEO could be will be changed, but a mediocre CEO will stay in a very long time and just destroy value over, over the
• 35:48
  Haren Bhakta: course of maybe a decade or two.
• 35:51
  Haren Bhakta: Today Terrible CEOs can be locked in because there's no longer a mechanism to remove them.
• 36:00
  Haren Bhakta: Like I said, in the past, we could vote o- vote out terrible management and replace m- terrible management with a CEO that maybe shareholders think more highly of.
• 36:11
  Haren Bhakta: But today, with BlackRock, Vanguard, and State Street controlling all of corporate America, who automatically essentially vote for incumbents, there's no longer a mechanism to remove them.
• 36:26
  Haren Bhakta: And pretty soon, as they continue to take market share we're gonna see...
• 36:30
  Haren Bhakta: right now they're already the largest shareholder in America, but pretty soon they're gonna be larger than all other shareholders combined, and that's a scary thought where if they own more than all other shareholders combined, this will entrench management,
• 36:49
  Haren Bhakta: and they will control, even being terrible, they will control that company with no mechanism to have them removed.
• 36:59
  Haren Bhakta: That's a scary thought
• 37:02
  Ryan: And do you even feel some of these large asset managers even complete the proxy votes?
• 37:07
  Ryan: Just are gonna shove
• 37:08
  Haren Bhakta: outsource it to ISS and, things like that.
• 37:11
  Haren Bhakta: So it's like they're automatically essentially voting for incumbents.
• 37:15
  Haren Bhakta: It's very hard for them to get them to vote for a change.
• 37:18
  Haren Bhakta: And w- if we, if you get a terrible board, they're essentially locked in, and they're g- and that's becoming more and more the case where these terrible boards are locked in with no mechanism to have them removed.
• 37:32
  Haren Bhakta: In the past, we would vote them out.
• 37:35
  Haren Bhakta: Now no one's vote counts anymore except for BlackRock, Vanguard, and State Street and they're not really voting
• 37:43
  Ryan: It's one of those risks like you-- that hidden, right?
• 37:47
  Ryan: It's a hidden r- people don't think about, and as they just keep getting bigger and bigger, reduces our power as shareholder
• 37:57
  Haren Bhakta: absolutely, yeah.
• 37:59
  Haren Bhakta: And you get these forced buyers, so they're blindly throwing money at these companies, at these CEOs that may not deserve it simply because of their market cap size.
• 38:08
  Haren Bhakta: But the insiders own nothing, and blindly the S&P just throws money at them.
• 38:14
  Haren Bhakta: And I believe we created a solution for that.
• 38:16
  Haren Bhakta: We should be indexing to the leaders of the organization and how much they own versus the, the pure size of the company
• 38:25
  Ryan: Very good point.
• 38:26
  Ryan: Very good point.
• 38:27
  Ryan: So lastly, Aaron, fantastic conversation.
• 38:30
  Ryan: I love it.
• 38:31
  Ryan: A lot of information here and facts that information I didn't know about.
• 38:36
  Ryan: Lastly, for all the financial advisors out there listening, how can they use this strategy in their clients' portfolios?
• 38:43
  Ryan: You own the index.
• 38:46
  Ryan: How can they implement this strategy within a portfolio?
• 38:50
  Haren Bhakta: Yeah.
• 38:50
  Haren Bhakta: We have the ETF.
• 38:51
  Haren Bhakta: ETF's ticker symbol is O-W-N, OWN.
• 38:56
  Ryan: Love
• 38:56
  Haren Bhakta: easy to remember.
• 38:57
  Ryan: that one,
• 38:58
  Haren Bhakta: Yeah.
• 38:59
  Haren Bhakta: Yeah.
• 38:59
  Ryan: we can remember that one.
• 39:01
  Haren Bhakta: Yeah.
• 39:01
  Haren Bhakta: Yeah.
• 39:02
  Haren Bhakta: So what I find is for, oh, for one, it has a 49 basis points, so just under half a percent expense ratio, and it's well-deserved because, again we're capturing more exposure to the most innovative companies.
• 39:15
  Haren Bhakta: And what I find advisors using is, for one they could reduce exposure to the stock market, I believe, by being...
• 39:22
  Haren Bhakta: having a more concentrated portfolio of stocks that are more innovative and, potentially have more upside.
• 39:31
  Haren Bhakta: So advisors could, by using OWN, they could diversify the client portfolios in other asset classes more as the stock market is at all-time highs, we should be looking to participate.
• 39:47
  Haren Bhakta: You have to participate in the stock market, for one.
• 39:49
  Haren Bhakta: You can't time yourself out of it.
• 39:50
  Haren Bhakta: But what you can do is reduce exposure to the stock market at all-time highs or near all-time highs and diversify in other alternatives or fixed income.
• 40:01
  Haren Bhakta: And as the market gets cheaper, you could allocate more and more to the market at the at cheaper prices.
• 40:09
  Haren Bhakta: But what I find advisors doing is using the OWN index to get more of what's working or more of the innovative companies while reducing exposure to the stock market
• 40:23
  Ryan: Love it.
• 40:23
  Ryan: Perfect.
• 40:24
  Ryan: Perfect information.
• 40:25
  Ryan: So those advisors, our audience, if they want more information about Inside Ownership Index and the ETF, where can they get that information?
• 40:34
  Haren Bhakta: Yeah, I have an even easier website, insideownership.com.
• 40:38
  Haren Bhakta: Very easy to find, insideownership.com.
• 40:41
  Haren Bhakta: M- they could also look me up on LinkedIn and other social media.
• 40:46
  Haren Bhakta: I'm very easy to find here in BHACTA.
• 40:49
  Haren Bhakta: Website also they could email me through the website insideownership.com.
• 40:54
  Haren Bhakta: So very, yeah, very easy to find.
• 40:56
  Haren Bhakta: Happy to talk to anyone get, go deeper into the methodology with anyone who's interested
• 41:03
  Ryan: I love it, Aaron.
• 41:04
  Ryan: Fantastic conversation.
• 41:05
  Ryan: I really enjoyed it.
• 41:06
  Ryan: Like I said, I learned a lot.
• 41:08
  Ryan: You threw a lot of great information, supporting data, supporting information, which I really enjoy.
• 41:14
  Ryan: I will include those links to the website in the show notes.
• 41:18
  Ryan: Really interesting stuff, and I like it simple.
• 41:21
  Ryan: you for
• 41:21
  Haren Bhakta: Awesome.
• 41:22
  Ryan: it simple for me, Aaron.
• 41:23
  Haren Bhakta: Yeah
• 41:24
  Ryan: it.
• 41:24
  Ryan: It's been an honor.
• 41:26
  Ryan: Really enjoyed it.
• 41:27
  Ryan: So thank you for coming on.
• 41:29
  Ryan: thank you so much for listening to this episode of Adjusted for Risk podcast.
• 41:33
  Ryan: You can watch all of our other episodes on YouTube and all the other platforms that you listen to your favorite podcasts.
• 41:39
  Ryan: Please be sure to like and subscribe to those channels and give us a follow on LinkedIn.
• 41:43
  Ryan: Thank you very much and have a great rest of your week