The Insider Buying Lie

I’m busy with a massive rebalance today, nibbling at equities after a 15% decline and some minor bond trimming to get my core accounts back to their weightings.  That said, I did want to take a moment to put this out there…

One of the dumbest syllogisms in all of investing goes like this:

• The insiders are buying their own stock
• Insiders know more about the prospects of their own companies than anyone else
• Therefore, I should be buying the stock along with them

Do me favor and trust me on this, in my retail broker days I used this syllogism to brutal effect – it is an utterly unstoppable weapon for those in the business of selling stocks, it cannot be disagreed with.

Today will you hear the following insider buying statistic a multitude of times, mostly from long-only mutual fund managers or buy-and-hold asset gatherers who are attempting to soothe the markets (and their investors):

More executives at Standard & Poor’s 500 Index companies are buying their stock than any time since the depths of the credit crisis after valuations plunged 25 percent below their five-decade average.  Sixty-six insiders at 50 companies bought shares between Aug. 3 and Aug. 9, the most since the five days ended March 9, 2009, when the benchmark index for U.S. equities reached a 12- year low, according to data compiled by Bloomberg.

That buzzing sound you hear is my chainsaw getting fired up…

Don’t get me wrong, there is nothing negative about insider buying, but there is often very little meaning when aggregating this kind of data to spin some kind of narrative that “Corporate America thinks their stock is cheap.”

Repeat after me: “Not all insider buying is created equal.”

Here’s what’s up…That Bloomberg story mentions a specific case, the purchase of 175,000 shares of Morgan Stanley ($MS) by CEO James Gorman and two of his fellow Morgan Stanley execs.  If you are a shareholder of Morgan Stanley, which is printing fresh multi-year lows every week, then you are encouraged by the fact that management is buying.  And this is exactly what management is aiming to accomplish – encouragement.  They are “showing a vote of confidence” and “putting their money where their mouth is” and knocking out all those other management cliches in an attempt to chill shareholders out and perhaps slow down the stock’s slide.

And it just may work, but don’t ever confuse a “vote of confidence” purchase with a purchase made with the intentions of making money.  These are two different animals.  I’m sure Gorman expects to hold for a long time and would love to see some upside someday soon, but he is not a trader and his buy will not help you if the economy worsens – something Gorman will never admit is possible and certainly has no control over.

Are there CEOs who buy their own stock opportunistically?  Absolutely.  But most of the opportunistic action taken by execs involves the selling of vested stock as part of their compensation, not open market purchasing.  Often, when there is an open market purchase, it has more to do with publicity than anything else.

Source:

Insiders Buy Stocks at Highest Rate Since 2009 (Bloomberg)