Tracking the insiders on Wall Street can be an extremely nuanced and complex process at times. Looking at every piece of information, every clue, and every transaction can become tedious, and when that happens, the possibility of you making the wrong decision or inference can arise.
That’s why I have a set of 4 rules that I always follow and go back to when I get bogged down in the mass of information.
I thought it would be a good idea to share these rules with you now, so here they are…
Keep in mind that these 4 rules aren’t the only ideas and basis for the actions I take in reaction to insider transactions. They are simply some of the main reminders I have for myself in order to always stay focused and on track.
Rule #1:
Purchases carry much more weight than sales.
This is rule number one because it is easy to see a humongous number next to an insider sale and become completely focused on it. However, insider sales aren’t nearly as meaningful as insider purchases.
Any company officer could have 1,000 reasons to sell stock in his or her company…they need the money to buy a house, someone in the family became ill, they want to buy a yacht, etc.
On the flip side, insiders basically only buy because of one reason…they think the price will go up.
Yes, insiders can sell when they believe the price will be going down, but it’s foolish to think every sale is due to that reasoning.
So, it is important to remember that big selling isn’t always important, but big buying usually is.
Rule #2:
Look for group buying.
My second rule is to seek out the companies that have experienced transactions by several insiders within a relatively small time frame.
This rule is simple. If one insider buys shares, maybe he or she knows something about the company that will affect the price. If, say, five insiders buy shares within a week of each other, they have probably all received news about their company that is likely to send the price of its shares up.
Multiple insiders buying shares at the same time is virtually never a coincidence. It’s a huge hint instead.
Rule #3:
Value is more important than the number of shares.
If Insider A buys 100 shares of his company at $2.00 per share, and Insider B buys 50 shares at $10.00 per share, which purchase is more meaningful?
Obviously these numbers are very small for the sake of easily understanding this example, but you can tell that Insider A’s purchase has a value of $200, and Insider B’s purchase has a value of $500.
Don’t let the number of shares bought deceive you. Just like a big insider sale number can trick you into thinking it is more important than it really is, a large number of shares purchased can steal your attention despite the fact that the shares are dirt-cheap.
Look for big values rather than big share numbers.
Rule #4:
The insiders don’t know it all.
The insiders have the advantage of knowing some vital information before the rest of us do, but they certainly don’t know everything.
One of the most critical lessons you could ever learn about investing is that the insiders don’t have a crystal ball, and they definitely don’t always get it right.
The fact of the matter is that we still have to utilize all of our resources and knowledge to get a solid portfolio together. We cannot simply use insider transactions as our only indicator and expect to make consistent profits.
That’s why it is so important to learn the other indicators in regard to buying and selling stocks, such as those taught in the Stock Code Breaker course.
