Insider Buying/Selling: The Collected Wisdom of a Thousand Heartbreaks

With stocks challenging multi-year highs, I thought today would be a good opportunity to address one persistently negative datapoint that seems to be stuck in our collective craw – the trend of insider selling way outpacing insider buying in Corporate America.  And no, I have no idea what the hell a “craw” is, I’m a northerner.

My pal The Pragmatic Capitalist has done an excellent job on his site of documenting the weekly flow of sellers versus buyers and as you can plainly see, insiders are simply not showing up and purchasing shares of their own companies.  For example, insider buying totaled only $4.6 million worth of stock last week while selling hit $626 million. 

Of course, this is not bullish…but is it straight-up bearish?  Since I’ve fought all of these battles and learned a lot about the utility of tracking insiders (the hard way), I’ll share some of my insights on the subject and let you decide how meaningful this data is…

There will be generalizations below, take them with a grain of salt:

1.  “Growth Stocks” don’t get bought by insiders and executives unless the shares get hammered by a one-time event.

2.  Insider buying in “Value Stocks” is way more meaningful, especially in turnaround situations.

3.  Technology executives would rather be locked in a dark basement, listening to Billy Joel’s Uptown Girl on an endless loop, than make an open market purchase of their own stock.   

4.  Technology executives are supposed to sell stock all the time.  They are compensated with stock options, don’t let their sales be off-putting to you in and of themselves.

5.  Don’t be too excited about share buybacks until you compare them with stock option awards, as buybacks are sometimes used to cancel out this dilution.  This is the main reason Cisco Systems has traded and will always trade in the same price range for the rest of your natural life, despite buying back billions in shares each year.

6.  Be suspicious of multiple insiders buying at the same time in small increments as these purchases may end up looking merely symbolic in hindsight, especially when the company ends up dropping an earnings bomb.

7.  Distinguish between options being exercised and open market purchases.  A CEO being handed shares is meangless for investors, a CEO putting up his own capital may be meaningful.

8.  Insiders do stupid things all the time, they are human.  For some reference points, examine the insider buys in Bear Stearns stock  in the months leading to the collapse.  You can also look at the margin mess created by Aubrey Maclendon in shares of Chesapeake Energy – the man almost lost his entire stake in his company because of leveraged stock holdings.  Had you followed Sumner Redstone’s purchases of Midway Games, you’d have bought the stock from 4 to 17 to zero over the course of 9 years. 

9.  I avoid the stocks of executives who go on TV and speak promotionally while dumping larger-than-normal blocks of their own stock.  This is because I’m street smart and Street smart.  It’s not always the right thing to do, but I sure feel better.

10.  There has never been a conclusive study done that proves any direct correlation between the major market indices and the presence of either insider buying or insider selling in the aggregate.  This information is much more valuable for assessing individual stocks than the broader markets.

***

So there you have it, the hard-earned collected wisdom of someone who’s followed insiders, ignored insiders and everything in between.  There are exceptions to these chestnuts, but not many.