Tuesday, July 16, 2024

Follow the Insiders to Gain an Edge Over the Market

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In today’s world, the financial rewards for success in the stock market are so huge – and the competition for them is so intense – that an investor needs an edge.

Not just a perceived edge, but an actual one.

And the best edge, in my view, is to invest in the same stocks that the insiders are buying with their own money at current market prices.

Insiders have purchased stock in record numbers as of late. Yet the typical punter is doing the exact opposite.

Millions of investors have bailed out of stocks because they couldn’t take the pain anymore. (And, in doing so, they turned paper losses into actual losses.)

Corporate insiders couldn’t take the pain anymore either.

They couldn’t stand to see their companies’ shares selling at fire-sale levels without doing something about it.

And so they did…

Yet the spike in insider purchases coincided with investors pulling cash from their equity funds.

The punters are acting on emotion. (Fear, particularly.)

The insiders are acting on numbers, analysis and reason. And perhaps a different emotion. (Greed.)

One of the best strategies you can follow is to ride the coattails of knowledgeable insiders.

Why? Because they have access to all sorts of information, like…

  • The direction of sales since the last quarterly report
  • New products and services in development
  • Any expansion plans
  • Potential mergers and acquisitions
  • Whether the company has gained or lost any key customers
  • The status of outstanding litigation
  • Whether the company will put itself up for sale
  • Plans to take the company private.

And there’s plenty of other good stuff that those of us on the outside looking in may not fully understand.

That’s why the Securities and Exchange Commission requires corporate insiders – officers, directors and beneficial owners – to file a Form 4 within two business days of any purchase or sale, detailing the number of shares bought, on what date and at what price.

Making this information public at least levels the playing field.

(You may not know why the insiders are buying. But at least you can see that they are.)

If you want to increase your stock market returns, you need to know what the insiders are doing.

Buying stocks that insiders are bailing out of or selling stocks that they are eagerly buying is a fundamental mistake.

Even when corporate fundamentals are checkered or poor, if the insiders are buying heavily it is generally a sign that the problems are temporary and the stock is set to press higher.

Indeed, plenty of academic studies have confirmed that stocks with heavy insider buying tend to outperform the broad market in the months that follow.

Do you know which stocks the insiders are piling into right now? You should.

Because those are the companies whose shares are most likely to perform best in the weeks and months ahead, no matter what the broad market does.

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