As Senior Director of Client Development and Support at Dow Jones Indexes, Ridgely's job is to work with clients and support their business needs. He was instrumental in developing the Dow Jones RBP IndexesSM. The analytics behind these indexes attempt to gauge whether a company's senior management can perform at a level that justifies its current stock price (i.e., the "Required Business Performance," or "RBP®," or a given company).
And it is the stock market's very complexity—and uncertainty—that makes the Dow Jones RBP IndexesSM valuable. Dow Jones—together with partner Transparent Value, LLC, which has since been acquired by Guggenheim Partners—created a 130/30 index in 2008 using the RBP® probability metric. The index methodology takes the 30 stocks in an index ranked lowest by RBP® probability and underweights (or "shorts") them in order to overweight (or "go long in") the top 30.
"We found that the RBP® metric works as a fundamental risk factor for both over- and undervalued stocks," he says. "We launched six related indexes in 2008 with this philosophic basis: the leading and lagging indexes on the Dow Jones U.S. Large-Cap IndexesSM, Dow Jones U.S. Large-Cap Growth IndexesSM and the Dow Jones U.S. Large-Cap Value IndexesSM."
However, the Dow Jones and Transparent Value teams learned one thing right after the indexes got under way: Markets have a mind of their own. This made the teams expand on their approach.
Ridgely's group sat down to think of ways to measure the markets' wild—and unpredictable—behavior. They found that the RBP® metric could be enhanced if factors beyond fundamentals were considered in building an index.
"The more we learned about the power of the metric we were using, the more applications we were able to create," says the 24-year Dow Jones veteran. "We decided to add more factors to the index methodology. For a market factor, we started to use stock beta. For a technical factor, we decided on momentum. The RBP® metric comes into the index methodology after those other factors are considered."
"Because markets are so complicated, RBP® becomes a useful, even fundamental tool for anyone trying to measure stocks. That's what Dow Jones RBP IndexesSM do—they add insight to the valuation process."
Ridgely pauses to show a series of graphs that highlight the role that RBP® played in understanding a group of stocks. It is clear that he feels that the very nature of the metric is what makes it beneficial.
"Remember, this is required business performance," he says, emphasizing the "R" in RBP®. "Transparent Value has incredibly sophisticated systems that permit them to input financial reports—along with pricing data—faster than ever before. Transparent Value incorporates it into the RBP® model to show its view based on objective principles related to reverse discounted cash flow on the probability that the company can validate its price."
Clearly Ridgely is a believer in RBP®. And he certainly thinks that the Dow Jones RBP IndexesSM are worthwhile to market players.
But what about existing metrics, for example, price-to-earnings (P/E) ratio? RBP® is not nearly as popular as this oft-quoted, widely accepted number. Does he think that RBP® will become a gauge akin to P/E?
Ridgely smiles and leans forward, looking over three different white papers that he is currently reading. He is unstinting.
"The RBP® metric incorporates more information than just earnings. The problem with the P/E ratio is that the 'E' (earnings) can be an incomplete assessment.
"It's just not as representative of the overall fundamentals of a company as RBP® is."