I was watching an episode of ABC’s “Shark Tank” recently when I recalled a bold and controversial statement one of the show’s “shark” investors made years ago concerning the stock market. A reporter had asked billionaire Mark Cuban, a pro basketball team owner and tech entrepreneur, about what investing advice he would give young people. Here’s how Cuban responded:
“Put it in the bank. The idiots that tell you to put your money in the market because eventually it will go up need to tell you that because they are trying to sell you something. The stock market is probably the worst investment vehicle out there.”
His comments were shocking in part because the market, on average, has provided long-term investors with an average annual return of 8 – 9 percent even during many “bear” or down market years. They’re also ironic because stocks are a big reason why he is a billionaire today. More on that later. But Cuban is no fool and you need to think like an insider in order to understand his seemingly bizarre advice.
Cuban went on to explain that he, like Warren Buffett, buys shares of a stock primarily to get some level of control of the company. He added that no one should put their money into something where they don’t have an “information advantage.” In other words, don’t buy a stock if you’re just guessing about its future and praying that the shares will go up.
Well, he’s right except for one thing. There’s actually a proven way for you to gain an information advantage: Watch what the insiders are doing.
The Securities and Exchange Commission (SEC) requires insiders to report all their transactions. These trades offer you major clues as to a stock’s future prospects. Of course, you’ll still need to do your due diligence on that company before you decide to invest.
Don’t draw any conclusions based on one or two insider trades because those can be very misleading. First, you should track the stock’s insider trading over time instead in order to get a more accurate sense of coming moves. Second, research earnings reports to learn about the company’s financial health.
Next, review the stock’s technical chart to spot ongoing price and trading volume trends. Finally, you’ll want to consider general economic trends that may affect the company and/or its industry sector. Or you could just sign up for my C.H.I.R.P. stock-picking service and let me take care of all those things for you. Check your email for your exclusive invitation.
By the way, Cuban became rich in 1999 when he sold the streaming media company he co-founded, Broadcast.com, for $5.7 billion in Yahoo! stock just before the tech bubble burst. So he’s actually quite the shrewd market player.
In fact, Cuban’s such an insider that the SEC went after him for alleged insider trading violations connected to the sale of shares of Mamma.com, which may have saved him from a loss of $750,000. The case wound its way through the courts before a Texas jury eventually found him innocent of all charges in 2013.
So, I guess watching the insiders can give you an information advantage after all. I rest my case, your honor.
Note from Midas Legacy Editor: “Banker X” must remain anonymous for our purposes, but in his official capacity he’s a CNBC-quoted bestselling author. A former investment banking insider, Banker X is a multi-millionaire as a result of his inside contacts and continues to provide great profits for subscribers to his C.H.I.R.P. service. Check your email for your exclusive invitation.