Insider buying and selling
In doing so, we compete with quantitative-based analytics that are pouring hundreds of millions of dollars into similar things, but retail investors rarely see the edge. But thanks to regulation, there are many things that make us retail investors look just like (or look less like) everyone else. One of them is insider buying. There’s a gray area in reporting and executing trades, so the exact timing isn’t the most important thing, just knowing in advance that insiders are buying.
Here’s why this makes sense: In the words of an old investing great:
“Insiders may sell stock for a variety of reasons, but the only reason they buy stock is because they think the price will go up.” —Peter Lynch
Insider purchases are much more important than sales. Because money may be needed for various reasons that have nothing to do with the company in question. The most obvious is divorce. Because the person making the purchase is actually increasing their exposure to the stock in question, even though they are usually already employed by the company and tend to benefit from stock options and company plans in addition. Purchase is abnormal. In some cases, a CEO/CFO may need to publicly demonstrate confidence in their company by making an acquisition (which should be avoided), but the typical inside factory buyer is There’s no real reason to buy it other than to think things are good. stock. From a betting perspective, insider buying doubles down on their already large exposure to the success of the company in question.
Peter Lynch was a man who strongly believed that you should invest in stocks that you understood. An example of an “unexpected” (i.e., unregulated) insider purchase he gave was a firefighter who was conducting fire protection patrols in an industrial area around Palmer, Massachusetts in the 1950s. In order to expand the brand’s business, we had to continue expanding our travel range. everytime. Without really knowing what they were making, he bought stock in the companies in question and retired as a millionaire by 1970. By the same logic, I invested in NVDIA in April 2016 (for my mother’s portfolio) – why? My company marketed their business (we couldn’t figure it out) ), whose public RFP was the first document I’ve ever read that made sense in terms of AI (actually self-driving car) strategy. These two examples of his have inherent caveats, and while Peter’s lynching quote above is frequently cited, his second recommendation of his is rarely reported.
“Finding promising companies is only the first step. The next step is research.” —Peter Lynch
For NVDA
The NVDIA situation is a case in point, where the investments made for my mother were based on her diversified portfolio and understanding of semiconductor stocks. A good RFP in and of itself isn’t the only reason why we chose to take the plunge; combined with other considerations, this is how we approach all insider purchases.There was something very interesting Reddit post I shamelessly talk about this. steal from Use it as research for this article. As we know, not all insider purchases always lead to success.
shape 1 Source r/options on Reddit 02/25/2024
The Redditor’s research above covers a three-year period and is sobering for those who believe it’s simply a matter of blindly following insiders. This post was probably meant to encourage you to subscribe to insiderxtrade.com, but it was very enlightening. The period covers the three years up to the second quarter of 2023, which was a particularly challenging stock market environment. One might conclude that small-cap stocks are only of short-term interest and that perhaps mid- and large-cap insider buyers are more on point with their actions. This analysis follows an older, less detailed analysis, which similarly found that simply trading the S&P yielded more positive returns, but to the extent insider buyers’ returns are winners, they We concluded that it was a big winner over the S&P by some margin. So whatever we do, it’s clear that we can’t simply buy when insiders are buying.
Who should I follow?
This comes back to the same question. You should only follow the right insiders, but the question is which insiders?
The answer is that you should follow if other circumstances indicate that the stock in question may be interesting, but you don’t know the general timing of an uptrend. Warren Buffett’s idea that what went up last year will go up next year is a truism, but it’s difficult to follow in practice when you inevitably pick stocks that did well last year but fell sharply. Examples of a reasonable approach using insider buying are shown below for two of his companies in the defense sector.in red Lockheed Martin (LMT) blue is the defense company Rheinmetall (RHM.DE), which is listed on the German stock market.
To understand the chart below, note that both companies have specific buying and selling limits each quarter, as is normal for any publicly traded company, and are easily identified by looking at the timing of insider purchases. please.
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Yellow points 1 and 2 are public events related to the two stocks in question. Namely, Russia’s invasion of Ukraine and the German Chancellor’s announcement of “.”Seitenwende“Flashy German” that bob dylan To put it more simply:times are changing”. This came at the same time as a 100 billion euro defense spending package to strengthen the German military. Both items are related to defense stocks, but guess where the first event moved both. The second one only boosted German companies. US companies in the defense sector are making more profits, but the few companies that remain in Europe are on a much lower base. Because it starts from , it is expected to grow faster. This has made it interesting to invest in.
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The small white dots are insider buying for LMT. In fact, he is one man. john donovan These people were chosen from among LMT’s 115,000 employees and the many, many others who must report insider trading. LMT reports approximately 30 insider transactions (mainly fills and sales) per year. John is the only bull, combining his LMT director position with his PANW director position.
- The reddish-pink numbers are purchases by Rheinmetall insiders. In fact, he only had two sales during that entire period, and they were by one person who also acquired a large stake.All numbers there represent between ~3 to 6 insiders have bought shares. The differences between LMT and the company become even more pronounced when you consider the fact that Rheinmetall only has 33,000 employees and reports about 10 transactions a year.
The performance difference is significant, with Rheinmetall easily outperforming LMT, but as we can see from (3), not all purchases were necessarily made at perfect timing. The meteoric rise in stock prices in early 2022 led to a general pause where the market as a whole, rather than corporate performance, drove up stock prices. Insiders are always buying, and the combination of sustained insider buying and little selling in companies that are doing well makes this argument convincing. Lonely John Donovan wasn’t without money, but Rheinmetall’s close-knit group of buyers certainly had an advantage. The difference is that in Germany’s case, insider actions were worth paying attention to because more than just regional conflicts drove up stock prices. Basically they are confirming that when you are an insider and know that the end of a good thing is near, the uptrend should continue. A sight you sell but never buy.
Confirmation of trend break
This brings us to a third way to look at insider buying in a different light: confirmation that the trend has turned positive. Up until now, we’ve looked at insider purchases as stock-based, secretly hoping that some great spark would sway the insider and we’d profit by association. Needless to say, we’re not allowed to trade on insider knowledge, so it makes sense to look at insider purchases on a more meta level.
If you’ve been investing for a while, you’ve probably experienced market downturns. My first experience was the 1987 crash, but many will remember the market crash that followed COVID-19, dot-coms, subprime, the government debt crisis, and more. warren buffet He always entertains (and consoles us) with his saying that when the market goes down, the flag disappears, because at a buffet house it’s a good thing that “hamburgers” are cheaper. Masu. Importantly, there never seems to be any certainty that the market won’t fall further. Experience has shown that recoveries are very strong when you buy near the market lows, and in fact within a fairly wide range from the lows. ” type.Buy it and keep it.” But our fear tends to keep us from investing at the right time, and when we look back, we lament, “It was obvious that this pandemic was going to go away someday.” Or maybe the boom that made us all uncomfortable was followed by a new, comparable boom.
The analysis below has been “explored” again. putnam But it’s a very good guide to looking at insider buying another way. In 2020, after the coronavirus Armageddon, they realized:
According to them, these were invisible levels, but what makes their analysis interesting is that they chose where to invest based on that. They selected the cyclical side of the market as the side that is hit the hardest and tends to recover fastest once recovery begins after a recession. ‘Scattered eyes’ be wiped away.
Although it is now too late to look at insider buying during this period, at least on the NASDAQ site, we have to assume that their stock pick, FCX, also had its share of insider buying. It is also very sensitive to the price of copper, which itself is directly related to economic activity. There can be no economic growth without copper, and its price has been a boon for the entire economy ever since electronics began dominating our lives.
shape 2 FCX chart from 2020/01/01 to 2022/04
As you can see from the graph above, Putnam must have worked, but frankly it didn’t take a genius to figure this out, or even quantum access to data or expensive tools. Admittedly, it’s impossible to time the dip, but more or less you may be right. Even if it’s just 1 month or 3 months.I was fine. What was important was the combination of insider buying and insight into other drivers of the stock price (in this case, the perception that the market was bottoming due to widespread insider buying and bottoming out in copper prices).
conclusion
The conclusion of this post is that insider purchases are not a direct trigger for investment, but are simply useful contribution signals in certain circumstances. Options are ideal for taking advantage of these signals because they help move the market more subtly than outright purchases of stocks. A properly researched approach to an insider buying scenario is to buy his LEAP for all or part of the investment and sell some short options. This gives you some protection if the market declines or goes sideways, but allows you to gradually move out the sold callup if the stock gains momentum. The so-called “poor man’s covered call” is an option trader’s insider buying strategy.