Tuesday, February 28, 2012

Insider Trading Flashes Warning--But Does It Matter?

Following the buying and selling decisions of company executives concerning stock in their own companies makes conceptual sense.  As Warren Buffett has noted, which side of a trade would you rather be on--that of an individual (or even institutional) investor, or that of a corporate insider, who presumably knows the prospects of that company better than anyone?

While there are various reasons for an executive to sell shares (such as exercising options or diversifying for estate planning), an executive usually buys shares for one reason--an expectation that the shares will rise in price.  I acknowledge that companies often require senior executives to own a specified amount of company stock, so buying in that case would not necessarily indicate the stock is undervalued.  But in general, I continue to pay attention to reported insider transactions.

Yet the empirical results are mixed.  In the 1990's, insiders generally bought all the way up to the peak before selling near the peak in 2000.  They then bought near the low in 2002.  But then the record sours.  They sold in 2003 and missed the market rise to the peak in 2007, and started buying in the summer of 2008, before the plunge in the autumn of 2008.

Recent reports reflect an increase in insider selling.  That by itself is not sufficient reason to sell stocks at current levels.  A 25% rise in the last four months and widespread optimism among sentiment measures is, however, reason enough to raise cash.

Steve Lehman

S & P 500:  1370

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