Trade on Inside Information, LEGALLY!
Wednesday, April 23, 2008 | Teeka TiwariRating:
Editor's Note: This week's conversation with Teeka is complete and ready for download. Listen now to hear ...
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Monday marked the launch of an important new service here at The Tycoon Report. For the first time ever, we are offering insider trading data through The Tycoon Smart Money Tracker, and the best part is that it's all FREE!
- How to play "earnings season" ... and how not to
- A list of sectors that tend to perform well (or not as poorly) in a recession
- Teeka's analysis of BHP's takeover bid for Rio Tinto
- PLUS: Our favorite reader question yet!
Click Here to Listen >>
Monday marked the launch of an important new service here at The Tycoon Report. For the first time ever, we are offering insider trading data through The Tycoon Smart Money Tracker, and the best part is that it's all FREE!
If you get the Tycoon Report delivered to your in-box each day, then you are already receiving The Tycoon Smart Money Tracker.
I wanted to share some of my experiences with using this type of data to make money.
With so many stocks to choose from, it's good to have a way to quickly sort through which ones deserve your attention and which ones don’t. At PointandProfit.com, I do this by only looking at stocks in select sectors that are exhibiting very specific chart patterns.
However, I also have other criteria that I use for what I like to call “special situation” stocks. One of the ways that I identify these stocks is through insider buying or selling.
What I am looking for is action that is out of the ordinary. Many executives have regularly scheduled periods when they are sellers or buyers of stock. I don’t care about that. What grabs my attention is when we see a particularly large jag of buying or selling that we’ve never seen before. Over the years, I've narrowed my approach down to a few simple questions.
i. What type of buying is going on?
Not all insider buying is created equal. How much is the insider buying vs. previous buys? I lend far more weight to an open market insider buyer purchase (bought at market prices) than an insider exercising a million shares at a 5 cents a share while the stock is trading at $60!
Who wouldn’t make that trade!
ii. What’s more important: insider buys or insider sells?
There are many reasons to sell a stock (education, home, diversification etc…) but only one reason to buy a stock: because you think it’s going up! I hate to burst anyone’s bubble, but insiders are just as prone to making bad investment decisions as the rest of us!
So insider buying alone is not enough to warrant a purchase. Which leads me too…
iii. Is the insider buying (or selling) being confirmed by the stock action?
I remember being short Thornburg Mortgage (TMA). The insiders were buying like crazy, but the stock was still performing like a stock getting ready to go lower. Sometimes insiders are wrong, and sometimes company officers use insider buying to manipulate investor perception.
Similarly, when I went long Inco (since bought out by RIO) a couple of years ago, the insiders were dumping shares like mad. BUT the stock action was the complete reverse with the stock being incredibly well bid. Anytime a big chunk of stock came onto the market it was gobbled up and the stock moved higher.
In lieu of all other factors, always pay attention to how the stock is acting.
If insiders are buying but the stock is violating support levels, then there is a good chance that the insiders are wrong. If insiders are selling and the stock is making brand new all time historical highs, chances are they are wrong. Of course, the opposite is also true. If I'm seeing out of the ordinary insider stock buys, along with break outs to all time new highs on the stock on big volume, I am going to get bullish right quick! If I see a stock breaking new lows each week and the insiders are dumping stock, you don't have to be a rocket scientist to figure out that something is very wrong and it's time get short that stock.
You can’t find an apple if you’re looking in an orange grove.
The most important thing about these new insider buying reports is that they will expose you to new stocks and sectors outside of your normal purview. This can lead to the discovery of some amazing investment finds!
In 2005, I found a tiny California bank stock then trading at $5 a share. Over a few months, the insiders had gobbled up more than 10% of the outstanding float! Just 18 months later the stock was trading over $20, and eventually went north of $40. I would have never found that stock had I not paid attention to the insider activity.
There's more than one way to skin a cat, and more than one way to use this data. I'd love to hear how you you've used insider buying and selling to make money in your accounts.
(Please let us know what you think about Teeka Tiwari's article.)
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“Let the Game Come to You.”
Teeka Tiwari
Chief Investment Officer
Point & Profit
