UPDATED: April 2022
How to Fully Benefit from Monitoring the Trades of Company Insiders – Insiders are the executive managers and directors who are in front of the financial and strategic decision making of their firm. Insider trading activity is very informative to follow because their trades tell us something about the valuation of stock since insiders know their business better than anyone else. As a consequence of having performed months of empirical research on insider out-performance and having read all papers covering the topic, our knowledge on the topic is extensive.
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How to Fully Benefit from Monitoring the Trades of Company Insiders
Our experience tells us that there are several significant misgivings and misunderstandings regarding insider information. In this article, we will discuss the biggest misunderstandings and provide some valuable information to take into account if you want to follow up on insider trades for investment purposes.
1. Take Insider Purchases in Consideration to Reduce the Impact of Human Emotions
Every investor knows the feeling of hesitation regarding an investment decision as it can have a strong impact on your wealth. These emotions are particularly present when the stock makes a sudden steep drop or if the share price is depressed for a significant time period. Due to this biased behavior and a lack of knowledge about the firm, potential buyers oftentimes don’t engage in strong buying opportunities, and owners sell out of fear that they will lose even more money.
If you feel like you are beginning to trade based on emotions rather than facts, insider activity can help with making investment decisions. If you are hesitating about a stock, check out whether insiders were buying recently. As these insiders know perfectly how their company is doing, this can increase your knowledge about the company’s prospects.
2. Take Insider Purchasing Activity More Seriously When They Trade in Clusters
Many empirical papers have been written regarding the most informative insider trades. One of the most significant findings came from Alldredge et al, who found that clustered trades (multiple insiders buying close to each other) outperform solitary trades significantly. They found that the one-month abnormal return (return in excess of the market movement, taking into account the stock’s risks) for clustered insider trades was 2.1% compared to 1.3% for solitary trades, a significant difference.
This is intuitive because when many insiders buy their stock, the probability of undervaluation could be higher. Thus, if you are taking into account insider purchases in your investment strategy, clustered purchases are more informative than solitary ones.
3. Don’t Give Attention to Insider Trades, It Doesn’t Tell You Anything About Returns
The biggest misunderstanding regarding insider trades is about the insider sales information. There’s much empirical evidence that contradicts the statement that insider sales are negative for the stock. Insider sales have no relationship with future stock returns as there are many reasons to sell a stock, such as wealth diversification, exercising granted stock options, and freeing money to buy other things. Therefore, one should not look at insider sales at all.
Many insiders such as Mark Zuckerberg from Facebook and Tim Cook from Apple just sell shares regularly because they want to cash in some options. That doesn’t tell us anything about the stock’s valuation.
Conclusion to How to Fully Benefit from Monitoring the Trades of Company Insiders
Insider information can be very valuable to include in your investment strategy. However, there’s a wide divergence in performance between the hundreds of purchases each month. For example, routine trades are not informative, solitary trades are less informative, and insiders outperform, particularly in value stocks, proven by empirical evidence. We suggest taking the tips provided in this article into consideration when you analyze insider trades in the future. It could improve your returns significantly.
About the Author & How YOU Can Profit: This article is the copyrighted product of the team at BuybackAnalytics.com .
Buyback Analytics is a Top Tier Investing Platform to help investors find, analyze, and profit from investing opportunities not found through traditional investment tools. We specialize in this simple concept: Follow the trades of Insiders – CONSISTENTLY PROFITABLE Traders, Investors, and Institutions because THEY get Inside Information that YOU don’t:
LEGAL Insider Trading / Inside Traders (CEOs, CFOs, Corporation’s Accountants & Attorneys, Politicians, etc.)
Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)
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