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You’d Better Watch Out (For The Insiders)

by | Nov 24, 2023

If you’re a trader or investor looking for ideas, there’s one place you should start… 

You see, across the market there are various anomalies. 

These anomalies refer to a set of patterns or events that deviate from the expected behavior of financial markets. Anomalies are typically discovered in historical market data and studied by academics. A few examplies include the January Effect (historically markets perform better in January than any other month), Momentum, Mean Reversion, Liquidity Effects on individual stocks, and human reaction and overreaction. 

But there is no more powerful anomaly in finance than that of insider buying. Executives who purchase their own stock exploit the markets by purchasing the stock at beaten down levels and then typically enjoy a pop when the deal is announced in government data. Now, keep in mind, they’re not trading their stocks. When insiders buy, they have a long-term mindset and must adhere to regulatory guidelines when they buy and sell a stock in which they have material knowledge. 

Today, I want to talk about the five reasons why you MUST pay attention to insider buying and selling at the CEO and CFO level. These high-ranking executives are knowledgeable about critical details or plans about their companies. Their investment decisions should be a vital part of your investment strategy looking ahead.

Why Follow CEOS: Confidence and Conviction

If a CEO or CFO buys their stock with their own money (Filing an SEC Form 4 document), it sends a powerful message to the world. They believe that their stock price will go higher in the future. This is a deep sign of confidence that the company’s strategies are working and that their financial performance will improve in the future. It also suggests that the two people who know the company and its balance sheet best believe the stock is undervalued. By following these insiders, you can feed off their confidence to boost your conviction in buying a stock.

Reason 2: CEO and CFO Interests

I love executives who have skin in the game. When insiders buy, they have incentivized themselves to improve the performance of a company and its stock price. This is an alignment in the interest of the shareholders. Such alignment suggests that the executives are focused on generating long-term value for investors – and they will make money alongside their shareholders. 

Reason 3: Information Insight

No one knows the company’s strategy and future better than the CEO. No one knows the balance sheet better than the CFO. These two executives know far more than market analysts about the company’s into future plans, strategies, and potential market-moving events before they hit the newspapers. If we track the buying of these executives, we can see their optimism in the future, even if we don’t have the information they do. 

Reason 4: The SEC

Not only is it great that executives can have skin in the game, but it’s also important that we have total transparency provided by our regulators. When executives buy and sell their stock, they must follow rigid guidelines around their plans. Typically, would-be buyers put their own money into the stock – and they must file a Form 4 document, which arrives publicly within 48 to 72 hours. But they also must wait a period of time before they can sell. They aren’t swing trading their own stocks… and they’re not engaging in shady trading strategies like our politicians. 

Reason 5: A Reason to Dig Deeper

Insider buying can suggest that the company is going to release a new product or launch a new strategic partneship. It might be a reflection of expected higher profit margins in the future. Whatever it is, it allows us to dig deeper and study the company even further. This can provide some key opportunities to spot great trades depending on various timelines in the future on options chain. In the case of insider buying, I prefer to sell credit spreads on the actions of insiders – especially CEOs and CFOs. 

In conclusion, we are always looking for a way to improve our edge as traders and investors. Following CEO/CFO activity is a great way to find companies and qualify the purchases of these executives. Over at Executive Payouts Unlimited, we will take a nice gain this week on American Express (AXP) using the very strategy that I outlined, as that position will expire as planned. 

Enjoy your weekend,

Garrett signature



Garrett Baldwin

WRITTEN BY<br>Garrett Baldwin

Garrett Baldwin

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