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A new study shows that an investment strategy that mimics how corporate insiders invest their own monies can beat the stock market by 10% -- per year.Go to Insiderize.com to learn more.
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Harvard Guide to Investing Like Insidersby Insiderize.com
Monday, January 23, 2012
IntroI’m always surprised when I talk to smart
investors and I inquire about insider trading. Eyes bulge, feet tap, and they start to inch away from me.
But I’m not talking about the illegal kind of insider trading.
I’m talking about a perfectly legal strategy that if done right, easily beats the stock market’s return over the long run -- tracking insider moves.
Monday, January 23, 2012
Insiders know earnings
“We find strong evidence that insider trades are associated with the firm’s
future earnings performance...--Piotroski and Roulstone (2003)
Monday, January 23, 2012
Why you should care
See, corporate insiders are allowed to legally trade in their firms’ stocks. Given their insider access, they should be the most knowledgeable about their firms.
So, when an insider reaches into his wallet and purchases his own company’s stock, your ears should perk up. You should start to take notice. Some of these insiders routinely make millions of dollars on their trading activity.
The best thing about this entire thing is that insiders must report their trades to the stock markets. It’s all public information. With some tweaking and good research, we can mimic the best insider trades in our own portfolios.
Seriously, a strategy that follows insider trading activity should earn 10% more than the stock market — per year.
Monday, January 23, 2012
Eyes open wide when a CFO buys her stock
Your eyes should become wide open when you see an insider, especially the CFO who normally sells
stocks only when the price rises, suddenly break this pattern by selling into price weakness.
-- Muzea, The Vital Few vs The Trivial Many: Invest with the Insiders, Not the Masses, 50-52
Monday, January 23, 2012
Two types of insider trading
1. Totally illegal: When an insider trades on information that’s should move stock prices and is not public, that’s illegal.
If he shares that info with s o m e o n e e l s e , t h a t ’s a l s o considered illegal inside trading.
Monday, January 23, 2012
Two types of insider trading
2. Completely legal: Insiders are allowed to buy and sell their stock as long as they aren’t acting on inside info. If they know a big acquisition is coming or that their earnings just dropped like a rock, they can’t do anything about it. But beyond that, they’re allowed to transact.
Given where insiders sit in their companies, this is as good as it gets.
Monday, January 23, 2012
Focus on $$ legal strategy
We’re going to stay very far away from the illegal type of insider trading and turn our attention to the legal kind.
As we’ll see, by mimicking certain insider trading activity, we can build a portfolio that beats the market by over 10% a year.
Monday, January 23, 2012
The Seyhun Insider Trading Modelfollow the insiders who have the best, most informative information
Monday, January 23, 2012
Insiders beat the market buying...and sellingSource: H Nejat Seyhun, Investment Intelligence from Insider Trading, 38
Number of Trading Months
Subsequent 12 Month Return
Buy 144,884 4.5%
Sell 164,309 -2.7%
Monday, January 23, 2012
Seyhun’s Strategy: Cliffs Notes Version
University of Michigan professor, Nejat Seyhun published a book entitled Investment Intelligence from Insider Trading. (By the way, this book totally deserves a place on your investment bookshelf.)
What Seyhun found was groundbreaking and no one else has studied insider trading like he has (until recently — I’ll tell you about that later).
Seyhun systematically dissected hundreds of thousands of trades made by insiders to see which ones perform the best.
• Track buys more than sells: When an insider buys on the open market (not via an options exercise), it means a whole lot. While we can’t really tell why an insider might sell, when he spends his own money to purchase his own firm’s stock — well, we can be pretty sure he feels confident about the stock going up.
• Look for multiple and BIG buys: You want to buy companies that are experiencing multiple insiders buying the stock simultaneously. That group buying is a good signal that things are looking up for the company. Also, look for people putting serious cash into their firm’s stock.
• Stay away from disagreement: Insider trading strategies work best when there isn’t any diversion of opinion. It’s best to see multiple insiders buying and no one selling during this period.
• Target smaller firms: Insider trading is more informative when you see it in small cap and mid cap companies versus large capitalization firms. So, keep your eyes open for buying activity in mid-size companies.
• Look for insiders with better information: There are a variety of different types of insiders, ranging from mid-level executives to CFOs and CEOS to hedge funds and mutual funds that own over 5% of a company. C-level executives have a birds-eye view — we want to follow them more so than outside investors or more junior employees (generally).
Monday, January 23, 2012
Active vs Passive
Buys, not sells
Clusters of insidersInsider
consensus
Small caps
Earnings surprises
Bidder firms
Large purchases
Follow the Insiders
Monday, January 23, 2012
Easy peasy trading strategy
That’s it. If you were to implement an insider strategy like I describe in my book, Tradestream your Way to Profits: Building a Killer Portfolio in the Age of Social Media, it should beat the markets by 7% on average.
That was Seyhun’s contribution: follow the right group of insiders (want to see senior managers in smaller companies buying together) and you can seriously beat the markets.
Monday, January 23, 2012
Limits to Seyhun’s Awesome Strategy
But there’s a limitation to this strategy. Know why?
Because Seyhun created a insider trading strategy that is built on following types of insiders, not actual insiders themselves.
To actually implement Seyhun’s strategy, you would just have to buy ALL companies experiencing the right type of insider trading. That could be hundreds of companies at a given time.
It just isn’t practical.
But what if you could improve on Professor Seyhun’s research?
What if you could actually identify — by name — those insiders with the most valuable information?
With the best trading history?
What if you could filter out the noise of all the other insider trading activity and focus only on the insider trading with the most information value?
Monday, January 23, 2012
Harvard’s Cohen makes improvement
That’s EXACTLY what Harvard Professor of Finance Lauren Cohen did in an obscure paper she published in late 2011.
Her revolutionary approach was found to beat the market by 10% a year with more accurate results and fewer trades.
Monday, January 23, 2012
The Harvard Guide to Following Insider Trading
Harvard’s Lauren Cohen recognized the shortcomings in the Seyhun model:
Insiders trade for all kinds of reasons and when you look at aggregate trading activity, you’re going to get a lot of noise. Also, to replicate a strategy with a lot of noise — you’re going to have to make a lot of trades.
It’s impractical. And expensive.
She asked herself: what if you could filter out all those routine trades made by insiders year after year and focus only on the trades that seem extraordinary?
Trades that seem to convey real information that the insider actually knows something.
“Classifying trading in this way allows us to strip away these uninformative signals, leaving a set of information-rich trades by ‘opportunistic’ insiders that contain all of the predictive power
in the insider universe.”
Monday, January 23, 2012
The Harvard Guide to Following Insider Trading
And what she found was that by looking for patterns in insider trading activity, she could focus her research at the trader-level. She’s identifying exactly who is trading on good information and who is just going through the motions.
By determining who to follow — and who not- Cohen found that we could beat the markets
bymore than 10% a year.
These returns can go even higher when the trade signals coming from the insiders get stronger.
Monday, January 23, 2012
4 characteristics of insiders with a nose for the money
Researcher Cohen found that there are 4 characteristics you want to look for when studying insider trading information:
Look for:
1. insiders with longer tenure at the firm2. insiders from more geographically
concentrated firms3. insiders from poorly governed firms4. insiders from firms that make more products
Monday, January 23, 2012
Smart insiders are out there but hard to find
The majority of the insider trading activity is just noise.
In fact, Cohen found:
“Overall, trades made by routine traders comprise 55% of the total sample, while trades made by opportunistic traders represent 45% of the total sample.”
That means it’s harder to find and track the insiders making money. And that’s probably why insider trading is such a valuable, undiscovered strategy.
There are very few strategies that are able to beat the markets by that amount consistently. That’s why I’m so excited about this strategy.
Monday, January 23, 2012
Years of study --> Insiderize.com
I developed Insiderize after years of research.
I published my first book, Tradestream your Way to Profits: Building a Killer Portfolio in the Age of Social Media (Wiley, 2010). I devoted an entire chapter to the idea of using social media to track insider trading activity.
I’ve created strategies that I’ve used with clients to invest alongside legal insider trading. They’ve worked and worked really well — regularly beating the market by 5.2 − 6.9%.
Monday, January 23, 2012
Improving returns, slowly
But I wasn’t satisfied. I knew there was a better way to track insider trading and Cohen’s paper, Decoding Insider Information, provided the blueprint to making serious returns by tracking insider trading activity.
We have the tools and techniques to do this - unfortunately, for most investors, they don’t have the time or energy.
That’s where I come in — I developed Insiderize along with my partner BlueTrader.com, the absolutely, best, hands-down research tool for identifying profitable insider trading activity.
BlueTrader has developed really interesting technology to identify profitable trading opportunities. Since 2003, the Bullish Insider Alerts had an accuracy rate of 62.5% in predicting Alpha returns for equities in the U.S. Market.
Monday, January 23, 2012
What to do next
Not too shabby.
Together, we’re working to grow the awareness to the opportunities in tracking profitable insider trading activity. We’re doing that by surfacing trading ideas and data.
You’re in early. Congratulate yourself for taking the first step and sit back to receive ideas each and every week.
I appreciate your interest and look forward to sharing.
You can always reach me at my personal email address: [email protected]
Zack MillerFounder, Insiderize.com
P.S. You can also learn more about insider trading activity from my other site, Tradestreaming — free courses, podcast, presentations, etc. Lots of goodies. Sign up there too.
Monday, January 23, 2012
