The Edge

How To Trade Like An Insider, Legally.

Insider trading is illegal right? Executives with secret info trading their stock to make untold riches is the way the movies portray it all the time. But like most of what comes out of Hollywood, it over the type stereotyping. In fact, insiders can buy and sell their company stock and they do it all the time, legally.

Now, to be fair, there are rules that corporate executives and others with access to “material” facts must follow. One of those rules is to publicly disclose their trading activity. It’s called a SEC form 4. Insiders must submit form 4 when they buy or sell.

Insiders sell for a million and one reasons, not always because the feel the stock is overvalued. Buying is a different story. Famed mutual fund manager Peter Lynch put it best, “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” (1)

Mr. Lynch was intuitively onto something. According to a study titled The Linkage between Insider Trading Activities, Market Efficiency, and Stock Information Content, insider buying outperforms the market. (2)

The authors/researchers found, “insiders were able to beat the average market. Table 1 [page 42] showed that insiders did outperform the market over each period by a significant amount, which increases over the period of time. The data showed that after their purchase of stock, insiders were able to gain more return than the average market. In particular, insiders beat the market by 24.94 percent over one-month period, 30.59 percent over six-month period, and finally 36.33 percent over one year period.”

However, not all insider buying is the same, in our opinion. We look for what Insider Buying with Purpose. The list of things we consider include:

  • Past Performance – does the insider have a history of being on the “right side” of the trade.
  • Cluster Buys – when multiple people at the same company buy almost simultaneously.
  • Change of Heart – when an insider who sells, sells, or does nothing but collect options suddenly buys.
  • Commitment – dollar amount can be a tell, a $1 million buy has a much different feel than a $1,000 buy.

Many sites track insider activity, most require a subscription. Here are a few free resources that we use to help us identify insider buys with purpose.

InsiderCow.com keeps track of insider activity for the last six-day. They do offer a subscription plan for historical data and more timely reports. (We are in no way affiliated with Insider Cow and do not receive any compensation from them. We just like the free version of their site.)

Once we have a list of insider buys, we organize them by symbol and then look at the trading history for executives (CEOs, CFOs, VPs… and Directors) for trades of $10,000 or more at www.secform4.com (again, we do not benefit in any form by recommending secform4. It’s just a great resource and makes research a lot easier.)

Enter the stock symbol for the insider trade of interest and press search.

A page will open with recent insider transactions that looks like this, IBM being the example here.

And then click on the insider’s name from your InsiderCow.com research to see their trading history.

If you uncover an insider buy with purpose, it’s time to get to work researching the company, starting with their press releases, Google searches, research reports, earnings and sales estimates, recent stock price swings (we’ve come across many bottom fishers who buy after a bad earnings announcement and a price crash) … anything you can find to help you understand why the insiders might be buying.

If everything adds up after your review and you feel comfortable, maybe you tag along and insider trade legally.

1 – https://www.learningmarkets.com/using-insider-trading-in-your-investing/

2 – https://jbepnet.com/journals/Vol_4_No_3_September_2017/5.pdf