Why Most Stock Market Systems Fail… And This One Doesn’t By Alexander Green
The least you should expect when evaluating a stock picking system is that is passes the common sense test.
That means it should be
a) easily understandable and
b) intuitively believable.
(In my experience, if an investment system involves things like Fibonaccinumbers or Japanese candlestick formations, it’s best to give it a miss.)
That’s why I’m surprised more investors don’t use one of the most intuitive and successful stock market indicators of all: heavy insider buying.
Many years ago, insiders could buy or sell at any time for any reason and just pocket the gains. Needless to say, this infuriated most investors who rightly saw the game as rigged in favor of those holding material, non-public information.
And so the federal government began requiring corporate insiders to file a Form 4 with the SEC any time they transacted in their own company’s shares, detailing how much they bought or sold, at what price, and when.
If you don’t think the smart money is watching insider activity like a red-tailed hawk, you don’t know the smart money. Corporate insiders have a treasure trove of information available to them and they can hardly forget this knowledge when they go into the market to trade.
They know, for instance, the direction of sales since the last quarterly report, what new products and services are in development, whether pending litigation is about to be settled, and plenty of other stuff those of us on the outside looking in couldn’t possibly know.
The insiders have an enormous unfair advantage in trading their own company’s shares. That’s why the government requires them to file that Form 4 within 48 hours of any transaction.
And I can tell you from looking at these filings almost every day that most insiders file the same day they buy or sell. And you should take advantage of it by buying the same things they are.
Numerous studies have shown that stocks with heavy insider buying substantially outperform the market. (How could it really be otherwise?) That’s why it makes sense to ride the coattails of knowledgeable officers and directors. Yet I often find that ordinary investors have no idea which companies have corporate chiefs who are loading up on the stock.
There is still due diligence required, of course. You need to know how many insiders are buying, for example, and what their track records are. Have they bought shares in the past? If so, did they buy low and sell high?
And if they sit on the boards of other companies, did they buy low and sell high there, too? If so, you should score their buying higher than you would otherwise.
In essence, insiders vote with their wallets. Every time they pile into a stock, they are in effect saying that with everything they know about the company – including all sorts of material, non-public information – they believe it is selling for less than it’s worth.
That’s an excellent signal. So if you’re looking for a stock market system that is easy to understand, intuitive and effective, insider buying is a great place to start.
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It's all about "how much you made when you were right" & "how little you lost when you were wrong"