Anomaly – Listen to the Insiders

Anomaly – Listen to the Insiders

Today we’re talking about insider transactions. That’s whether key employees are buying or selling their company’s stock.

There’s overwhelming evidence that corporate executives try to time share purchases and sales in ways that benefit themselves personally. The challenge for investors is to separate the signal from the noise.

Most studies conclude that shares of companies that have experienced above-average insider buying tend to outperform the market by 5-10% per year.

On the other hand, the signal from insider selling is usually more difficult to distill.

That’s because insiders may sell shares for reasons that may have little to do with the prospects of their company…which could include tax considerations, estate planning, portfolio diversification, or even retirement.

Think of it this way. If a stock is truly underpriced, you would expect that insiders will do their best to hang on to it.

What applies to insiders also applies to the companies. Companies that repurchase shares tend to outperform the market, while firms that issue shares, tend to underperform.

What you find is that companies that do this typically announce better than expected earnings.