Why follow insiders?
When looking for investment ideas, keep a close eye on insiders
who are purchasing stock in their own companies. Consider the following
two points:
- Insiders know their own company and marketspace better than anyone and are
the best-qualified people to assess the future prospects for the stock
- No one buys a stock thinking that its price will go down - they
do so to make money
Insider qualifications
The term "insider" is defined by the SEC to include corporate officers
(CEO, CFO, COO, etc.), members of the board of directors, and large shareholders
(those who own more than 10% of a company). Given their position, corporate
officers and members of the board of directors have deeper insight into a
company's operations than any outside analyst could ever hope to attain, and
are also highly skilled businesspeople. With their knowlege and experience, it's
not a stretch to say that insiders are the best-qualified people in the world
to evaluate a company's future prospects. Quite simply, they are the
smart money.
There is only one reason to buy
Anyone who buys a stock does so because they expect the price to rise - no one invests
to lose money and insiders are no exception. There are two main reasons why insiders
would invest in their own companies:
- they think their business is about to get better and the stock price will
go up, or
- they think that their company is undervalued and they believe that with
time the market will correct by increasing the stock price.
Whatever the insiders' reasons for investing are, people on the outside only need to know
only one thing: they think that the stock price will go up.
Join top money managers
The profitability of following insiders has not escaped some of the top investors of our time.
Peter Lynch included insider buying as one of his famous 13 attributes of a "perfect" company
in his investing guide One up on Wall Street,
and Christopher Browne, a successful value investor, used insider trading as a
key point in his stock picking strategy. Now thanks to the advance of technology
and recent changes to SEC regulations, the information and tools these guys have been using
for years is now available to all investors.
Start with the insiders
If you're looking for companies to invest in, why not start with ones that have
leadership so confident of future success that they're literally putting their
own money where their mouth is? Start following insiders and improve your portfolio
returns.
