Haren Bhakta - Founder & CEO at Inside Ownership Index

Welcome to another Founder Wisdom pod. We have Harin Bacta with us today. Harin's a CFA. He's also a CEO and founder at Inside Ownership Index stock ticker dollar OWN. And yeah, he's as obsessed as I am, I guess, with Nassim Taleb and getting skin in the game. Watch the shirt here. So Harun, welcome to the pod. Tell us a bit more about yourself and what you've been up to.

Yeah, thanks, Charles. Thanks for having me on. Yeah, I'm obsessed with Nassim Taleb. I read the book Skin in the Game literally 7 times. You know, I think in the book, he says, learning is rooted in repetition and convexity. So the reading of the same text twice is more profitable than reading 2 different things once. So I took that Quite literally, I read it many times obsessed over the concepts of skin in the game, getting in the game stock market index, which is what you know what I'm working on now. I created the ETF that tracks that index with the ticker symbol OWN, as you mentioned, and you know it's self-explanatory. We're buying companies where the leaders of those organizations have skin in the game.

Interesting. Uh, how did you do the reps in your case, in your field so far?

Sorry, I think you, you Entered the Matrix a little while ago, so I only caught a little bit of what you said there.

Uh, yeah, I'm not sure if it's your connection, but I, I asked how did you do the reps in your industry?

How did I do the reps?

Yes.

Sorry, we'll have to cut out that part in between. But, um, well, uh, basically, I started out in wealth management in 2010, uh, working for Merrill Lynch, uh, spent 2 and a half years there, then went to Morgan Stanley, spent 5 and a half years at Morgan Stanley. In 2017, I left Morgan Stanley, started my own practice investing in micro— publicly traded, very small publicly traded companies. So I've been obsessed with, with investing for a very long time and reading and just learning. And by reading the book Skin in the Game, it's kind of like how I came to understand the power of of, uh, that concept or power of the individual, as most companies, uh, who do— that do great things usually have a single person behind that, that organization doing and inspiring everyone around them to do great things.

Got it. Um, but I don't know, like me on my end, the reps, right? So I, I ran ultras for once, right? Right? So it's like, I'm all about the reps. Like daily I speak to 15, 20 founders, investors, CEOs. What habits in your case do you repeat to be more knowledgeable and higher performers in your niche? That could be reading 10Ks per day, right? Like what habits do you sustain in your life to get the reps in and get an unfair advantage is my question.

I see. So, you know, I think I've read a lot about, you know, being 1% better every day, and it— that 1% compounds to, I think, like 300% or something over a year. I can't remember the exact number, but the point is I read every day. So I have a rule: I read at least 10 pages a day. And 10 pages is the minimum. Um, that's just, uh, to get me, uh, to get started. Very often I'm reading a lot more than 10 pages a day, but that's the minimum. And then I also, um, Uh, listen. I think in the, the book written by Nassim Taleb, actually, Black Swan, I think that that's what gave me the idea. There was someone in that book where, um, someone would have— I can't, I can't remember who the person was— would someone would read him the, the book walking around. So I, you know, now we don't— we have the technology where we can listen to podcasts. So I listen to podcasts and audiobooks as well. So if I'm showering Or getting ready for work or whatever it is I'm doing, I'm constantly learning. So I'm obsessed with learning. And very often, in fact, I listen to the same things because learning could be an intellectual exercise, but it's more important that it influences your behavior. So you haven't really learned something until it's actually influencing your behavior. So this is why it's so important to reread things. And I listen to Warren Buffett, his annual meetings. Um, I've listened to those for probably more than 5,000 hours combined. And, you know, the reason for that is good investing is more of a behavioral, um, uh, learning the right behaviors essentially, and not necessarily an intellectual exercise. Good investing is more about how you react to the market and to downturns, and not as much, you know, being smart.

Tell me why you launched your company. Like, that was in 2024, right? What did you do in between the period after Morgan Stanley, right? Like, were you just trading by yourself? What prompted you to to launch your own company?

Yeah, well, in 2017, when I left Morgan Stanley, I, I started the microcap, um, fund. We, uh, invested in microcaps. I ran what's called a proxy contest, so I was doing activism. I joined the board of a small publicly traded company. Uh, in 2023, we sold that company that we, we, um, bought full control of, and then we sold it in 2023. So I kind of had some, uh, time to figure out what I wanted to do next. Um, I'm a huge Berkshire fan and a Warren Buffett fan, as I mentioned. So I bought a lot of Berkshire Hathaway shares for myself and, and for my investors, my clients. And, um, uh, I started attending the annual meetings in Omaha every year. And in 2024, I actually thought of this company while sitting in the meeting. And the reason for that is this was the first meeting Charlie Munger had passed away, so he wasn't there. So in the back of my mind, I just had this kind of fear, like, what am I going to do with all my Berkshire shares when Warren Buffett dies? And halfway through the meeting, it actually hit me. The S&P 500 will be buying more Berkshire Hathaway when Warren Buffett dies. And the reason for that is the S&P is what's called free float adjusted, meaning that they don't count Warren Buffett's shares when they count the size of Berkshire. They exclude controlling shareholders. So when he dies, those shares will become free floating. And I just thought, well, why would anyone want more Berkshire Hathaway after Warren Buffett? We should want more in the company while he's there and less so when he's gone. And with the same respect, why would we want to buy more Tesla without Elon Musk, or more Meta after Mark Zuckerberg, right? We should want more of these companies, more exposure to these companies while they're there. So I came home from Omaha and just looked up, like, what if we simply invested in these companies more so and, and weighted them according to the ownership of these leaders. And I went back 20 years for the index, and then I went back 100 years looking at the top companies within the US and how they rotated. And what we find is the top companies always rotated once those responsible for the success of the organization left. And the only exception to that I could find is really Apple. Apple has continued to be great despite the leader making it great has left. But for the most part, most companies— I went back 100 years, so I went back to 1930 and looked at General Motors, which was the biggest company in the world. It held that lead for 20 years. In 1950, it was the biggest company in the world again. And it was run by one man, Alfred Sloan, who basically invented the concept of decentralization. Before that, every big company was, was centralized. And, um, they, they became a decentralized, um, holding company where they had, uh, maybe like 10 different brands of Chrysler, Buick, um, just many brands that they had and other other components to the car also ran independently. And, um, you know, they were a huge outlier. They produced enormous returns for those 20 years, held that lead for a very long time. Then Alfred Sloan retires in the mid-'50s, and GM never returns to being that great company it once was, right? Um, then we look at the biggest company in the world in the '80s, '70s and '80s. Again, it was IBM. IBM was run by one man, the son of the founder. Thomas Watson Sr. was the founder. It was the son, Thomas Watson Jr., that was the CEO that led IBM to that greatness. He retires from the board in 1984. Just 8 years after his retirement, IBM loses— it's no longer in the top 10. It was the biggest company in the world just 8 years after his retirement. They're not in the top 10 today. IBM is not even top 25. So, um, again, in the year 2000, GE, General Electric, was the biggest company in the world, run by Jack Welch. He created that greatness. He leaves in 2001, retires. Um, you know, General Electric is now broken apart into 3 different companies and definitely has underperformed the markets. It's, it's down had you invested in 2001 when he left, you'd have, you know, far less money now after 26 years. So Apple, again, is the only exception I could find. One thing I could find is that a great leader can very often pick a great replacement, but that replacement cannot and has not picked their replacement. And this is why the biggest companies in the world, in the US, are founded in our lifetime, run by leaders who are alive today, right? The biggest money manager in the world, BlackRock, all the competitive advantages a legacy company has, but the biggest money manager in the world is founded in my lifetime, run by a leader still alive running the company today. The biggest company in the world, NVIDIA, again, founded in the '80s. Pretty soon Anthropic and OpenAI going public, they were founded in the last, I think like the last 10 years or something. I'm not exactly sure when they were founded, but they're very new companies. So the biggest companies in the world are now being founded very recently. And this is because it takes that kind of founder mentality to create big disruption. And change the world, and it's always been the case. So yeah, the index they created basically favors that.

That's one criteria out of a hundred. I mean, it all makes sense, right? So what are other criteria is my first question when you decide like who you're going to invest in, and also what happens when the that leadership is gone. Do you just short the company? Is Is that what happens?

Yeah. Well, I think it's definitely not the sole criteria of investing in ownership and CEOs that have big ownership. But basically investors have 3 options when it comes to index funds. The 3 main options are you could do an equal-weight index. Buy all 500 companies, S&P 500, equally, and every quarter or year it gets rebalanced. So you sell the winners and, and buy the losers and rebalance back to the equal weighting. Or you could buy the same 500 companies, um, uh, proportional to its size, the market cap, right? Um, being big, uh, bigger is not the greatest criteria either, but it works. It's low cost, you get exposure to the market. Or the third option is you could index to the leaders within the organization, and now you're favoring— you're indexing to the leaders. So as the leaders become more and more successful, you're getting more exposure to them. And then when those leaders are gone, you're moving on to, you know, the the next leader, essentially. So you have basically 3 options, and it depends how you view the world. So it's a dumb index, right? Um, all 3 are, are, are, are simple. They don't require prediction. And, um, I think more and more investors are understanding that prediction is the wrong way to invest. So I created this passive fund so that we don't have to predict. We, we simply index to, to the leaders. Now, if you're a stock picker, um, I would say using, uh, ownership, um, is, uh, not the only answer, but it's enormous green flag. And, uh, using last year's earnings is, um, in my opinion, being less predictive now than ever before. So like, I'll give you an example. Intel and Nvidia in 2020, July of 2020, they were exactly the same company. They were both $250 billion. They both designed chips. In fact, at that moment in July of 2020, Intel had 7 times the revenue, 7 times the profits of Nvidia. Of Nvidia. It had a higher return on equity, a higher free cash flow yield. If you're a value investor, it looked like the no-brainer. Um, but fast forward 6 years, Intel is down or, um, underperformed the market. Uh, Nvidia created enormous wealth, is up more than 2,000%, probably, um, I think more like 2,200% now. Um, you know, but Nvidia has something Intel didn't. Nvidia had a founder-owner who went to bed thinking about the company every day and woke up thinking about it. Um, so when you have that type of ownership, um, uh, that kind of visionary leader, you want to invest more so in those companies, and you want to think more about the leaders and what they're capable of and less so about last year's earnings. And I think investors who have paid too much attention to last year's earnings— and I— it's important to understand what kind of company you're looking at. So if you're looking at Coca-Cola or a bubblegum company, last year's earnings can be very predictive about what the future could hold. So, you know, in that, that type of company, using last year's earnings could be helpful. But if you're investing in a technology company, And, you know, last year's earnings are not going to be predictive of what, uh, the future holds. It's, it's more about the capital allocation decisions they're making now is going to determine what the company is going to look like a couple years from now, right? So, um, simply using last year's earnings is not the way to invest in, in technology companies. This is why people talk about, um, Tesla being overvalued for, for 10 years, uh, or, you know, every other— Amazon, for example, created enormous wealth for shareholders, yet Wall Street always talked about it being, you know, it doesn't make a profit. Well, they're always looking at last year's earnings, and that was the problem. That's what people missed. Um, but when you're creating an innovative company, you, you, you, you have to look 5 years out, and it's very hard to look 5 years out if you're looking in the rearview mirror.

Okay. And regarding my question, right, like, what do you do when the company loses ownership on the top leader echelon? Do you short these companies?

Yeah. Well, sorry, I didn't answer that question. No. Well, I created an index fund and all it does is buy the top 100 companies in the S&P 500. So I don't personally short. In fact, I've never been good at shorting. I, I, in my past, I've shorted companies, and for the most part, it's been a mistake. You know, when you short a company, you could lose infinity, and the most you can make is 100%. But when you buy a company, you can make infinity, and, you know, your downside is just 100%. So I believe in just buying the market long-term. So I don't short companies. Again, I just created a passive index, so I'm not actually making predictive decisions on my investments.

Got it. Yeah, I mean, it all makes sense, right? Like, I'm a founder and not an investor, and to me it's crazy that investors are still making their decisions the way you describe, right? To me, it's all basic stuff. I won't agree in the fact— and I mean, if investors saw Nvidia the same way as Intel, I'm not saying it was obvious, but Nvidia has been long a— it could have been predictable, right? Like they long invested in making bigger and better GPUs. And yeah, you're right in the fact that the leadership difference I think was the main thing between the 2 companies. Jensen's a savage, right? Looking back, he was always a savage. It's just like most people didn't study him. But yeah, this guy's, Super obsessed, right?

Right.

Question for you, where do you leverage AI nowadays to select these stocks? Can you outsource your full algorithm to an AI and just feed it a bunch of companies and it will spit on the other end which one you should have in your index fund?

Yeah, well, I created a very rules-based index. The starting universe is the S&P 500. We simply take the same 500 companies Um, go through the proxy filings, which we're leveraging AI to now, um, open and read the proxy filings and pull out the ownership numbers which we need to run the index. So, um, simply, um, utilizing AI to make it easier to do this, um, you know, it has become very helpful. Other than that, I'm not really using AI. I mean, I'm helping— I'm using AI in terms of like marketing and writing um, uh, marketing material and things like that, creating images and stuff. So, um, I'm not using AI to evaluate companies because I'm not picking stocks anymore. Um, I will probably, uh, get back to investing in microcaps, which I'll, I'll leverage AI. And I think using AI, uh, to do more research on leadership is, um, I think much more important. And, and, um, rather than using AI to understand the, the financials, I think, um, you know, betting on leadership. Um, if you look at— I'll give you an example, okay? Um, if you made a graph of the people who understand financials, uh, for all Berkshire shareholders and Tesla shareholders, um, you'd have a negative correlation to the people who understand markets and those who got wealthy investing in Berkshire or Tesla. Those who trusted Warren Buffett and believed in Elon's mission are the ones that made all the wealth. Um, so it's like picking the right people to trust and letting them do their thing. I think, um, The biggest wealth, the people who invested in Amazon, I don't think there was a single shareholder other than Jeff Bezos's family that held Amazon from IPO till now, which, you know, if you just trusted the obsession of Jeff Bezos, could have made a lot of money. So I believe in just finding the right leaders and, um, not going in and out of, of the stock based on, um, some kind of—

But they need to be in the right market too, right? Like Bezos, I mean, he saw it at, uh, G. Shaw, whatever firm he was looking at, the size of the internet and how it was growing, right? And back in—

I think it's backward looking. So I, I, I, I, I think deciding what's the right market is, is very backward because they create new markets. So if you, for example, Elon Musk was working in the making cars, so you wouldn't have thought that making a, you know, maybe it's not a commodity, but making something that's very costly to make and all incumbents monopolize that industry and thinking that a new outsider can come into the car market and make a big, you know, market.

Elon is the one-in-one, I feel, example. I mean, Steve Jobs has his reality distortion field, we call it. But I mean, I don't think, for example, that Jensen had that reality distortion thing. I think he was in the right market and it took him forever to kick in. But once the AI revolution kicked in, then everything changed. I think it's really a case-by-case thing. Elon, anything he touches gonna go to the moon, right? And Tesla is not value investing. Tesla doesn't make sense on paper, but this guy, Elon's greatest invention is not his cars or his solar panel or Starlink. It's its brand and its reality distortion field. So I would say yes to Elon, but Bezos, dude, like people wanted to shop online just like I wanted my grocery to the door, right? And Uber Eats fulfilled that demand. So, I believe there's a thing at the intersection of product-market fit and the founder-market fit.

Yeah, but I think predicting that in advance is much more difficult. I think just finding the right leaders— I'll give you an example, like Robinhood. If you look at what they're building, like every 20-year-old who wants to invest in stocks now opens up a Robinhood account. Now, these guys created a platform that is very much like a video game. And it's incredibly simple. And, and so the mindshare that they have— so if you look at Robinhood's financials, or I think you're, you're probably going to miss out. Um, if you look at Charles Schwab, for example, um, Schwab is still alive, the chairman today. Um, but once he's gone, um, you know, I think we're going to see like a company like Robinhood take over and they're going to capture a market that, that maybe we're not even thinking of today.

So, um, I'm most intrigued, like, of agents, you know, because at some point agents are gonna have that reality distortion field and we're not even gonna have real humans leading these companies. And I think agents will change that full dynamic. Pretty sure agents will be able to outperform Elon and pretty much everyone. So what will that— what will happen to your predictions once Once that's a reality?

Uh, I, I, I, I actually don't agree with you there. I think, um, decision-making, uh, creativity, um, you know, AI is great, but you have to, you have to come up with a question, and it's in the question that you ask it is the genius part, right? Um, so who, who could ask AI the right questions? And that's going to be a human, I think. I, yeah, I think, yeah, I guess I don't agree with you there. I think we're very far away, maybe 50 to 100 years away from, you know, it.

We're one update away. This is already happening. It's just Anthropic and OpenAI just keeping it behind closed door. Right now, AI is a product, right? It's an assistant. All we need to do is like an agentic loop. The AI can be self-motivated to achieve goals. In that case would be to bring the stock value up, right? And right now it's just a prompt and it needs the human approval by design, by policy, right? People would freak the fuck out if these things would be out there and just launching things by their own. But like 50 to 100 years, that's totally out of the ballpark. We're probably like a year or 2 away from Agentic stuff. I'm not saying this will conquer the full market, but I'm saying it will be deployed and we're going to start to freak out because this thing is going to, yeah, pretty much corner the market. It's going to be winner takes all. An agent, I mean, at the end of the day, we're not that magical as human. I do believe the 1% type of humans like Elon are still going to add tons of value and are still going to be relevant and competitive, but Yeah, I think this will happen soon. Haran, where can people find out more about you and your your index?

Yeah, I have a website insideownership.com. Very easy insideownership.com. I'm on LinkedIn as well, so very easy to find here in Bhakta. Yeah, people have questions. They want to look up more about the ETF. Again, it's insideownership.com. A ticker symbol O W N.

That was Haran and Charles for another.