#177: Eric Schleien with Haren Bhakta: Inside Ownership, Founder-Led Companies & The Skin in the Game Index

Summary

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Podcast Summary: The Intelligent Investing Podcast

Episode #177: Eric Schleien with Haren Bhakta: Inside Ownership, Founder-Led Companies & The Skin in the Game Index
Original Air Date: August 18, 2025
Host: Eric Schleien
Guest: Haren Bhakta, creator of the Inside Ownership Index

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Episode Overview

In this episode, Eric Schleien welcomes Haren Bhakta to explore the concept of "skin in the game" investing—specifically, the outperformance of companies where founders or key insiders hold significant stakes and operational roles. Bhakta discusses the genesis and methodology of his Inside Ownership Index, the empirical and psychological foundations for favoring founder-led businesses, and how index construction and ongoing innovation factor into returns. The discussion is data-rich with real-world anecdotes, index construction details, performance results, and forward-looking expansion plans.

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Key Discussion Points & Insights

1. Genesis of the Inside Ownership Index

[01:02 – 02:47]

• Origin Story: At the 2024 Berkshire Hathaway annual meeting, Bhakta was inspired by a question about index fund construction and realized free float-adjusted indexes (like the S&P 500) exclude controlled insider holdings (e.g., Buffett’s Berkshire shares), only buying in posthumously.
  • “When Warren Buffett dies, his shares will become free floating and therefore all index funds will then buy more Berkshire.” – Haren Bhakta (01:21)
• Personal Investment Shift: Bhakta moved his own portfolio into his proprietary index, arguing he wants reduced exposure to Berkshire, Amazon, and others once founders or dominant insiders are not involved.
  • “I don't own more of those companies when those founders are no longer around.” – Haren Bhakta (02:47)

2. Cultural and Performance Impact of Founders

[03:18 – 05:43]

• Insider Impact & Culture’s Role: Founder involvement correlates with culture preservation and, by extension, continued innovation and superior returns.
  • Examples: Intel (Andy Grove), Nike, and Starbucks all suffered after founder departures.
  • “As great of a culture that Buffett has made at Berkshire, most likely when he's gone, those cultures will erode too.” – Haren Bhakta (03:25)
• Founder-Led Companies Innovate: Bhakta and Schleien discuss how founders’ obsessive commitment cannot be replicated by outsiders.
  • “You can't hire someone to do that. Jeff Bezos. You can't go and hire Elon Musk or Jeff Bezos. There's just no one out there like that.” – Haren Bhakta (05:58)

3. Index Methodology, Testing, and Sector Outperformance

[06:21 – 09:26]

• Index Construction: Bhakta’s index focuses on high inside ownership, rebalancing when founders or major insiders depart.
• Performance: The index outperforms standard sector benchmarks, particularly in areas with high turnover and innovation. Exceptions are static sectors (e.g., energy, telecom).
  • “Any sector where winners change and there's been innovation, my index will outperform.” – Haren Bhakta (07:33)
• Empirical Evidence: Schleien references long-term studies:
  • Built to Last (1926–1990): Founder-led outperformance up to 15x S&P 500.
  • More recent data (post-1990): Still 3x S&P 500.
  • “Founder led outperformance was 15x from 1930 to 1990. And then post 1990 approximately 3x...” – Eric Schleien (09:11)

4. Competition, Transparency, and Index Expansion

[10:02 – 11:52]

• On Being Copied: Bhakta isn’t worried, welcoming validation and seeing branding as his moat.
• Transparency: Methodology and information are public.
• Future Plans: Expansion into other sectors (healthcare, financials, tech), additional indexes (mid cap, small cap, FTSE 100).
  • “I'll be launching all the other sectors as well... S and P, mid cap, S and P, small cap and the Footsie 100.” – Haren Bhakta (11:08)

5. Small Cap Indexing Challenges

[12:06 – 14:21]

• Issue: Successful small caps exit the small cap universe, leaving weaker peers behind, impacting returns.
  • “When you index in the small cap space, you know the best ones leave.” – Haren Bhakta (12:10)
• Possible Solutions: Discussed strategies for retaining former small caps in fund portfolios as they “graduate”, but acknowledged that many modern big winners never started as public small caps due to changes in public markets.
  • “Seems like the best companies these days haven't come from small cap land.” – Haren Bhakta (14:04)

6. Personal Stories & Index Mechanics

[15:10 – 17:36]

• “Nevada effect” story: Bhakta’s uncle worked at Nvidia, held on for decades—underscoring buy-and-hold success.
• Portfolio Turnover & Rebalancing: The index tracks S&P rebalancing (quarterly), and trades are minimal due to low-fee custodians (Schwab, Fidelity).
  • “I would say 70 to 80% of the stocks remain.” – Haren Bhakta (16:14)
• Example: Walmart recently dropped from the index following the Walton family’s exit from management.
  • “For the first time this past quarter it was eliminated. It's not even in my index anymore.” – Haren Bhakta (16:46)

7. Uniqueness of Low-Cost Producer Status & Founder Legacy

[17:35 – 19:24]

• Rare for Non-Founders: Virtually all sustained low-cost providers have been founder-led; few examples otherwise.
  • “There hasn't been a low cost producer that's come out of a company without a founder.” – Haren Bhakta (17:36)

8. Execution, Automation, and Fees

[19:30 – 20:56]

• Operational Details: Manual extraction of proxy data; AI automation in progress.
  • “I'm working on an AI setup pretty soon... It'll pull up proxies, scan the data, and I'll be implementing AI pretty soon.” – Haren Bhakta (19:50)
• Low-Cost Model: Charges 0.25% (25 basis points), emphasizing passivity and low cost for advisors.
  • “I just charge what I need to charge to make a living and get all the data.” – Haren Bhakta (20:56)

9. Access and Closing

[21:09]

• Website: insideownership.com is the official source for info.
  • “I have a website. It's inside ownership.com ownership.” – Haren Bhakta (21:09)
• Domain Story: “Insider ownership” taken, not in use, considering purchase in future.

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Notable Quotes & Memorable Moments

• On Why Indexes Ignore Insider Holdings:
  • “Their rationale is it doesn't impact the price. They're not using any kind of analysis.” — Haren Bhakta (02:06)
• On Founder Obsession:
  • “Founders go to sleep, wake up thinking about their company. Yeah, you can't hire someone to do that.” — Haren Bhakta (05:58)
• On Index Outperformance Data:
  • “Founder led outperformance was 15x from 1930 to 1990. And then post 1990 approximately 3x...” — Eric Schleien (09:11)
• On Being Copied:
  • “If I get copied, it means that I created something pretty fabulous.” — Haren Bhakta (10:02)
• Personal Investment Reflections:
  • “The best investment I picked was Berkshire Hathaway and that's always been my biggest holding.” — Haren Bhakta (10:37)
• On Never Selling:
  • “They say the best performing investment accounts are from dead people.” — Eric Schleien (15:23)

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Important Timestamps

• Genesis of the Index: 01:02–02:47
• Impact of Founders Leaving: 03:18–05:43
• Evidence of Outperformance: 08:01–09:26
• Index Methodology & Sector Results: 06:43–09:26
• Expansion and Index Launch Plans: 11:08–11:52
• Small Cap Fund Challenges: 12:06–14:21
• Automation and Fees Details: 19:30–20:56
• Access & Website Reference: 21:09

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Conclusion

This episode delivers a comprehensive look at how founder and insider participation is not just a soft factor but a hard driver of both innovation and long-term outperformance in the equity markets. Bhakta’s Skin in the Game/Inside Ownership Index is both a practical investment product and a statement about what creates real value in public companies. For investors and professionals interested in the intersection of business culture, index construction, and empirical results, it is an insightful listen flush with actionable ideas and data-backed conviction.

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Transcript

[A]

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[B]

Hi, this is Eric Schlein. You are listening to the Intelligent Investing podcast. Today we have on Haran Bhakta, who runs the Inside Ownership Index. The Inside Ownership 100 index measures the performance of shares owned by insiders. Just as The S&P 500 serves as a proxy for the general economy, the inside ownership 100 represents corporate decision makers at the highest level. In other words, it can be called the skin of the game index. And without further ado, Harin Bhakta, welcome to the show.

[C]

Hey, thank you for having me.

[B]

Of course. So, just would like to get right into it. What had you think of this idea? Like, you give us a little background on the genesis of this fund.

[C]

For one, I know you've been attending Berkshire annual meetings since you were a kid, right?

[B]

I've been going to those since before I could walk. Yeah, I used to crawl to the meeting.

[C]

Yeah, I thought of this idea while I was at the annual meeting in 2024. Someone asked Warren Buffett a question about index funds and equal weight funds. It's got me thinking that when Warren Buffett dies, all index funds, or at least all free float adjusted index funds like the P500 will have to buy more. Berkshire 500 is free float adjusted, so it excludes shares held by controlling shareholders. When Warren Buffett dies, his shares will become free floating and therefore all index funds will then buy more Berkshire.

[B]

Why do they do that? What is the reasoning behind that? A lot of people I don't think know that.

[C]

Yeah, well, the reason behind it is they are holding it for control purposes and they're not valuing the company. For example, Warren Buffett would never sell Berkshire. It didn't matter what price it was selling for. He wouldn't sell. Their rationale is it doesn't impact the price. They're not using any kind of analysis. So because it doesn't impact the price, they don't include it. That's interesting because there's no theoretic price that Warren Buffett would sell for.

[B]

Got it.

[C]

Yeah. So it's not efficient.

[B]

And from that perspective, it makes sense.

[C]

And for me personally as an investor, I don't want to own more Berkshire when Warren Buffett's gone. In fact, I own less. I was a big Berkshire shareholder. Since then, I put all my funds into my index, which will automatically reduce exposure to Berkshire when Warren Buffett. Warren Buffett is no longer an insider. The same rationale goes with Jeff Bezos and Amazon, Elon Musk and Tesla and Jensen with Nvidia. I don't own more of those companies when those founders are no longer around.

[B]

Or when they're selling.

[C]

Or when they're selling. Exactly.

[B]

Because Jeff Bezos technically is not around Amazon, but he's still a major shareholder.

[C]

Well, you know, he's still a major shareholder. And my whole thesis is that as long as they're still there and on the board, the culture of Amazon will remain. And then you can see how cultures change once the founders are completely removed from the board. I'll give you a couple of examples. You can see Intel, Andy, grow. They're no longer there. I think intel's probably down 50% over the last five years since the pandemic. Then you got Nike and Starbucks. Both founders are gone. Those companies have not done well since. Cultures erode. As great of a culture that Buffett has made at Berkshire, most likely when he's gone, those cultures will erode too.

[B]

Interesting fact on intel that it's trading at the same price today. At the time of this recording, it's at 2242. On February 27, 1998, it was also at 2242.

[C]

Wow. Okay.

[B]

Isn't that crazy?

[C]

30 years.

[B]

The peak was at 7294 on August 25, 2000. So you're still quite a bit down from the peak in 2000.

[C]

Wow, that's crazy.

[B]

Yeah.

[C]

My index would have reduced significant exposure to intel because once the founders leave, inside ownership drops and my index will rebalance.

[B]

Interesting. Andy Grove left Intel in 1998. That's kind of wild, actually, because the performance up until then, you know, when. Before 2242. In 93 it was at $3.50. In 85 it was 54 cents. I mean, it had a performance before, obviously. Some of that I'm sure had to do with the tech bubble.

[C]

I read recently a statistic that I thought it's pretty amazing and relevant. What's the s and P500, the average between the top 10. Founded in 1985, the average top 10, 1920s.

[B]

That's interesting.

[C]

And I think the point is that it takes founders to innovate. Yeah, it takes founders to innovate.

[B]

Do you think a lot of the reason for that is just the culture of Wall street where from a job security standpoint, if you're not the founder and it's not your baby, it's almost better to go with the status quo than to try to innovate and potentially lose your job if you fail?

[C]

Yeah, I think it has a lot to do with it. Another part has to do with founders go to sleep, wake up thinking about their company. Yeah, you can't hire someone to do that. Jeff Bezos. You can't go and hire Elon Musk or Jeff Bezos. There's just no one out there like that. They create their companies, their babies.

[B]

So interesting idea. You come up with this idea. Now let me ask you, like, I think one of the pushbacks would be that possibly your methodology gets lucky just because it might be overweighted and the Mag 7 are in tech. I guess the question would be, you know, is this repeatable? I assume you're going to say yes, but I'm curious what the argument for that would be.

[C]

Yeah, that's a good question. Well, I just launched a couple of additional indexes using my methodology. I launched one purely for the technology sector within S and P and that one also crushed the pure technology index. So just using technology, my methodology versus S&P technology, mine crushed it. And coming out with each sector as well, I launched financials which also did better. And I think you'll see a trend that any sector where winners change and there's been innovation, my index will outperform. The sectors where my methodology didn't do better are mostly energy. Where Exxon and Chevron have been the leaders for a hundred years and then you have communications at&t and Verizon have been winners. You can see where they've had very low returns on invested capital and virtually no shareholder returns for the last couple of decades. Yeah, so my index will do better. When winners change, founders innovate. Any kind of cohort where you have that kind of dynamics, my index will do better.

[B]

I'm just looking at some data right now on founder led companies in the S and P and how those have done just generally founder led companies crushing the S and P. Yeah, my guess,

[C]

I've only backtested 20 years.

[B]

Yeah, I just back tested both 20 years and 50 years and they both do. Incredible.

[C]

Really.

[B]

Okay, this is according to ChatGPT anyway,

[C]

to do an official back test, which is what I did. I did 20 years just because it was very hard to get all the proxy data prior to 20 years ago. Lot of those companies don't even exist anymore. So getting those proxy filings, pretty much impossible.

[B]

The data it's using for 50 years on this is from the book Built to Last. They had data from 1926 to 1990 where founder companies outperform rivals by 15x. In that span, the data I'm looking at over 20 years S&P does between 9th and 10%. The founder led out performance was 3 to 4 times. The implied founder return was between 12 and 15% annually for 50 years. The S&P average return was 9.

[C]

8.

[B]

Founder led outperformance was 15x from 1930 to 1990. And then post 1990 approximately 3x and then implied founder return was 12 to 15% annually. So it seems rather consistent.

[C]

Just there's a lot of evidence that my index did it better than S and P for a much larger timeframe than 20 years. Just looking at the 90s, top three stocks of that decade were Intel, Microsoft and Qualcomm. All founder led, very high insidership. One of the top returning stocks in the 80s was Hasbro, the toy company.

[B]

Really? Yeah.

[C]

The CEO owned about 20%.

[B]

Okay, interesting. Are you worried of companies copying you from a business standpoint?

[C]

No, not really. Because for one, if I get copied, it means that I created something pretty fabulous. And number two, it's very easy to copy the S&P 500. S&P 500 manages trillions of dollars. I anticipate I will get copied at some point, but I have the brand.

[B]

Okay, yeah, that's interesting. Well, I'm looking through your brochure right now. Is this public info? Like could I do this? Okay, interesting. Now is this your full time thing now or are you still also picking individual stocks?

[C]

No, this is my full time thing. I'm no longer picking stocks. I was never that great at it anyway. The best investment I picked was Berkshire Hathaway and that's always been my biggest holding.

[B]

I don't want fell did pretty good.

[C]

Oh, Weston has done. Yeah, that was one of mine too.

[B]

Did you already sell it?

[C]

I sold it recently. After I sold it, it went up another 50%.

[B]

Okay.

[C]

But yeah, that was one of my.

[B]

Because you owned a lot of that, Right?

[C]

I owned a lot of that one. Okay. And after I sold it went up another 50%.

[B]

Yeah, let's see how it goes.

[C]

Yeah.

[B]

Anything else you want to share with listeners about the fund?

[C]

Well, like I sectors, healthcare, financials and technology. I'll be launching all the other sectors as well. But I'm also coming out with S and P, mid cap, S and P, small cap and the Footsie 100. So I'll be coming out with those probably this year.

[B]

Have you back tested those as well?

[C]

I have not back tested yet, but as I put that together, I'm going to launch the indexes anyway because I think at least when it comes to the US my index has probably done better. As I work through that, I'll take a look and either way I'm going to be launching them. It may be in Europe. It didn't do as well just because they haven't had major innovations. There hasn't really been any big founders out there.

[B]

I'm curious, let's say for like the small cap stocks. Right. Could you have the issue where the companies that get successful grow themselves out and then the ones that stay are the ones that are shitty. How do you rectify for that?

[C]

A lot of people ask me that what do I think of small caps. And that's always been my argument is that when you index in the small cap space, you know the best ones leave. Yeah. The fact that large cap has outperformed small cap at least in the last couple decades, I think that has a lot to do with it. I don't have a solution for that.

[B]

What about if you created a fund where you didn't sell if the company graduates, so you start all small cap but with the idea being that the fund doesn't make transactions if a company gets bigger. So it might evolve over time.

[C]

Yeah. So maybe they got all cap, but

[B]

you start with small caps.

[C]

That's something. If it leaves a small cap, it'll enter the mid cap and then once it leaves the mid capital, it'll find its way into the large cap. It will still work. You would just need an exposure to all three different indexes.

[A]

It's cozy season and nothing compares to wrapping yourself in a Minky Couture blanket. Luxuriously soft, perfectly warm, thoughtfully made. From movie nights to chilly mornings, Minky Couture turns everyday moments into pure comfort. Once you finish, feel it, you'll understand why it's called the original Best blanket ever. Visit minkycouture.com or a store near you and make this cozy season your softest one yet.

[B]

Interesting.

[C]

Yeah.

[B]

I wonder how that would back test. If you say I start with all small caps but I don't sell if something graduates, I wonder what the performance would be on that.

[C]

That would probably be pretty amazing. I'm wondering though, like now with private equity and venture capital, companies are less likely to Go public when they're small. At least the ones with a lot of potential, it seems like. I don't think Meta. That didn't start it out as a small cap.

[B]

No, it didn't. I remember when they went public, Google was never a small cap.

[C]

I'm not even sure if Nvidia started out as a small cap. It might have been a mid cap, but I haven't looked at that yet. It seems like the best companies these days haven't come from small cap land.

[B]

I'm looking up what the market cap of Nvidia was. Nvidia went public 1-22-99, and their market cap at IPO was around 408 million.

[C]

What does small caps look like back then?

[B]

What was considered a small cap back then? Yeah, I assume 200 million or less has been the general rule.

[C]

Okay. I think small caps now are like 3 billion. 4 billion. Yeah.

[B]

In 99, the general market cap ranges for U.S. equity. So small cap was considered 300 million to 1 billion.

[C]

Yeah. So Nvidia. Okay. I wonder how many people held.

[B]

I doubt not many.

[C]

Yeah, probably no one other than Jensen.

[B]

Well, because Nvidia was kind of considered a blog company for a while.

[C]

My dad's younger brother, my uncle, actually spent 16 years there. He just retired late last year. He never really sold, so he made up pretty well. Most of his cost basis is under a dollar. It's crazy.

[B]

They say the best performing investment accounts are from dead people.

[C]

Yeah. And the second best performing accounts come from people who forgot they had.

[B]

There you go. So there is a trend there.

[C]

There's a trend there. Never sell. That definitely makes a lot of sense. And that's why indexes do well because they never sell.

[B]

Have you launched your first one yet or not?

[C]

Right now I'm just managing separately managed accounts through Schwab and Fidelity and possibly some additional custodians.

[B]

So the sma is it holding every single company in the index and it's just automatically okay.

[C]

And then I have some direct indexing as well. We exclude certain stocks, for example, if you have a lot of exposure to Nvidia already, I would exclude Nvidia in those accounts.

[B]

Do the commissions get high if you're always rebalancing per account?

[C]

No, I think Schwab and Fidelity, you don't really charge for trades. Yeah. And there's not a lot of trading. I would say 70 to 80% of the stocks remain.

[B]

Aren't you rebalancing percentages though?

[C]

Yeah, so there's some trading going on. The biggest trade recently has been Walmart. Actually Walmart has been a top 10 position in my index for the full 20 years. And for the first time this past quarter it was eliminated. It's not even in my index anymore.

[B]

Walton family sold.

[C]

The Walton family, they retired.

[B]

Okay.

[C]

Yeah. So the second generation, Sam Walton's eldest son was the chairman and he just retired at the last shareholder meeting. So he didn't seek reelection.

[B]

But doesn't he still own stock?

[C]

He owns stock, but he's not an insider.

[B]

Okay, yeah, he's not considered an insider anymore.

[C]

He's not. Yeah. So you know, he's playing golf or doing something else with his time. And I think the whole point is that eventually Walmart will succumb to what? Every other company, I think. I don't know if you heard chit chat stock, but they brought up an interesting point recently. They've never heard of a company that became the low cost producer without a founder.

[B]

Really?

[C]

Yeah. So in order to become the low cost producer, I haven't found one where a company can remain the low cost producer once the founder is gone. There hasn't been a low cost producer that's come out of a company without a founder.

[B]

That's interesting.

[C]

My guess is Walmart will eventually be replaced by another low cost producer.

[B]

I'm trying to look up to see if there is anything.

[C]

Even Geico, that is the low cost producer. It became the producer from the founder.

[B]

Interesting. Okay, so they're saying GE is one.

[C]

GE is the producer.

[B]

It became a low cost producer under Jack Welch in 81. Okay, but you could also say that Welch set up to destroy the company. Yeah, I don't know if that's the best example.

[C]

Heavy red lights out. Yeah, so it went through a lot of that accounting shenanigans.

[B]

Exactly. That's not the best one per se. T Mobile is shown as an example. McKesson.

[C]

McKesson. They're not a producer, they're a distributor. Right.

[B]

Oh, so you mean straight producer.

[C]

No, I mean Amazon and Walmart. They're not producers, but they are the low cost provider.

[B]

Okay, interesting.

[C]

That's something to look into.

[B]

Yeah, there's not many interesting. How often are you rebalancing these portfolios in the SMS?

[C]

Yeah, so I follow the S&P 500 rebalance schedule. So I rebalance portally the third Friday of each quarter.

[B]

Okay. And then how do you. Is there software? Like what do you use to actually automate that process? How does that work on the logistics side?

[C]

Schwab and Fidelity have separately managed accounts, right? Now it's fairly easy. I put in my models and click a button and it gets rebalanced. Right now I do all the Insight ownership data manually and read each proxy filing, pull that data out. I'm working on an AI setup pretty soon where all of that will be automated. It'll pull up proxies, scan the data, and I'll be implementing AI pretty soon.

[B]

And what fee do you charge for this service?

[C]

25 basis points. So one quarter of a percentage. The idea is I want to be a low cost ETF once. Once I get there, I'm not charging much. I don't add any value. I'm not picking what stocks go in there. It's a passive index, so I'm trying to keep it as low cost as possible. I want to appeal to financial advisors that want to use it. They have the relationships with their clients and they deserve most of that fee. When they use my index, I just charge what I need to charge to make a living and get all the data.

[B]

Anything else that you want to share with listeners about your fund?

[C]

I can't really think of anything.

[B]

If they want to learn more information, where's the best place to get a hold of more info on this strategy?

[C]

Yeah, so I have a website. It's inside ownership.com ownership.

[B]

Yeah, that caught me off guard too when I first.

[C]

Yeah.

[B]

Was insider ownership already taken or just.

[C]

It's. It's taken and no one's using it. I think when you go to that website, it says it's available for sale for like $7,000. Maybe I'll buy it one day, but for now there doesn't seem to be a need.

[B]

Cool.

[C]

But yeah, thanks for your time.

[B]

Of course. Thank you. Well, I will talk to you soon, I'm sure.

[C]

All right, take care.

[B]

You have a good one.