Studying the insiders!

I know for a fact that many articles have been written about insider trading. Tons of them available on the internet. Even Tweedy Browne looks for value through the confirmation of insider trades. My personal take is that insider trades are not enough. What one needs to look for is a 'significant pattern of insider trades' according to Tweedy Browne. What that means is that one should look for a certain consensus among the insiders. What i look for is for the heavy weights. I want to make sure that the heavy weights of the company have loaded up on shares within the company and who are the heavyweights? The heavyweights are namely the Chief executive officer, the chief financial officer and the chairman. If these 3 fellows are scooping up shares in the open market, one can be to a large extent sure on one thing: The insiders think that their shares are worth a lot more. Why? These fellows are the ones who know their industry best, and the earnings estimates for the future or whether their recent marketing programs work. These fellows know it all baby! And what they are pretty sure of is that all these will eventually translate into positive news announcements in the near future and the bottom line.

As a practitioner, i would go one step further by considering one more point. From a psychological standpoint, a behavioural standpoint, all humans have 2 vital elements that causes market prices to fluctuate and that is 'fear' and 'greed'. What i want to know is that these fellows are acting out of greed. One is most greedy when one is most certain about the positive outlook for his company. So just to illustrate a real life example of my various info digging sessions, i was looking at one company on the Singapore stock exchange. It was a poor company by buffet's standards, No moats, no high ROEs etc but what happened was that the insiders were loading shares like crazy! And it so happened that one of the C level officers bought about a million dollars worth of the company's shares. I called its investor relations department up and as rude as they may have sounded, they revealed that this C-level officer earned about 1.2 million dollars in remuneration. That, to me was "greed"! He used up a huge portion of his salary to buy shares in the open market.

Although i did not buy its shares as i felt that it went against my own philosophy, my parents scooped it up in the open market. 3 months later, its shares doubled in price.


Of course, i am not advocating this approach in its entirety but i feel that one should combine it with fundamental analysis to buy a truely valuable company.

When it comes to investing there are only 2 rules: (forgive me for being a ripoff but i could not have said it better than buffet)
Rule No 1 : Dont lose money!
Rule No 2: Dont forget rule number 1!


Written by:
Lucas