If I had to buy a used car, I would either buy it from a person a trust, or go through a used car dealer. Why? Because of information asymmetry: I have a poor knowledge of car mechanics and I could be sold a lemon (aka useless car) for the price of a peach (aka car in good conditions). The opposite is also true when selling your car. Now think of the position of power the used car dealer employee has. He knows pretty well in what conditions is the car after examining it, and when a used car seller is undervaluation his good. Imagine this employee needs to change his car for a family van, and spots that kind of value gap for a van. He will probably buy the van for himself.
This is why insider information is so powerful. The good news is the US Stock market is very transparent as far as making publicly available the information about when an insider buys or sells stocks of his company. Insiders are usually directors, C-levels or +10% owners. Insider transaction tracking is by far my favorite research source for picking stocks. So much indeed that the first pricey research tool I bought was because I wanted more insights into these movements. Did it pay off? Yes, big time.
Problem is: the are time when Insiders are all out on buying, but most of the time they are selling. So relying on this strategy only would make you seat on your money invested for a long period of times. Or worse, it would make you buy shares of companies you don't even know. This should not be your only decision-making source, this strategy works best when combined with other factors. In my case, I found my best picks when combining Insider trading research with a shortlist of businesses I liked, had strong fundamentales, with Wall Street Analyst mostly optimistic about its future.
Insiders research tools
What research tool do I use for spying on insider trades? Well, as I told you before I made what I consider a major purchase for such a tool, but I would NOT recommend you to do the same. I use TipRanks Ultimate (600 USD / year, no monthly contract available). My subs expire next year so I will keep using it but if you read this, don´t spend your money on TipRanks, less so if you are an eToro user as you can access most of the info from TipRanks for free. I will spend an entire post soon about a little hack I learned to get the most useful info from insiders trades for free right from a Google Sheets watchlist.
What macro trends in insiders transactions tell us, and should you worry?
Ok now back to our matter, the examples I gave you above were from March and April, when Insiders were buying like crazy. I just gave you 3 examples but I made about 10 very lucrative trades triggered on Insider movements back then. Why? Because the S&P500 crashed about 30% when the pandemic was expanding worldwide, and because these insiders knew their business offered even more value in a post-pandemic world, they took advantage of the sell-off (see openInsider purchases vs sales graph).
But insiders are now rather sellings than buying, and some news outlets use this to sound the alarm.
The truth is: the track records of insiders beating the market are mixed when selling, but much better when buying 🤯. Besides March 2020, the last biggest peaks in insider buying were in Feb. 2009, at the bottom of the subprime crisis, and August 2011, after a global stock market crash following the credit rating downgrade by Standard and Poor of the US sovereign debt. So the last three biggest peaks of insiders buying were excellent timings to invest in the stock market.
There are many reasons for an insider to sell, but only one to buy, as the old saying goes.
Keep calm and keep investing
I would definitely not sound the alarm based on the sales to purchase ratio of insiders, but it does generate fewer buy signals for my strategy. It doesn't mean you should not invest, but you do have to be either more patient waiting for that kind of signal, or invest based on other strategies in the meantime. What I do is that I keep investing at a slower pace, building a larger cash position to be able to pull the trigger when insiders start buying again. And remember, always stick to your investment plan, it will protect you from emotionally charged decisions, mostly driven by fear, which are usually bad ones.
If you want to see my live portfolio, see my stats, or even copy my trades, you will need an account with eToro, which is the broker I use. In case you do open an account with eToro, use this referral link, let me know and you win 100 USD cash. If you have an account, you can look for me by my username "Nrikike".
Happy investing and let me know what you would like to read about in my next publications.