insider buying/selling

Early in my investing career, I became interested, as most neophytes do, in technical indicators. The arcanity (Google says this is a word, and if it isn’t it should be) of it intrigued me. And the leading exponents wore buckskin jackets, and cowboy hats and boots, adding to its carnival attractiveness.

My favorite indicator back then was odd-lot short sales. The general idea was that retail traders were the ultimate dumb money; within that group, the pinnacle of haplessness were retail short-sellers; and the ultimate worst were those who dealt in odd lots, that is, amounts less than a round lot (usually 100 shares).

In the several years I watched it, the indicator was uncannily accurate: when odd lotters sold short, the market went up; when they covered their shorts, the market plunged.

It has long since stopped working, though, for two reasons. Index derivatives and hedging against them became a thing, requiring that financial institutions were always shorting individual stocks in odd amounts. And the emergence of discount broking meant that it was easy for anyone to short, say, 250 (or 249) shares of a given stock–again muddying the formerly pure stream of odd-lot ineptitude.

…where I finally get to the topic

For me, the second-best technical indicator is insider buying. Typically, media commentators talk much more about insider selling. But I learned from my first stock market boss, who had ben around for 30+ years at the time, that executives can be selling for a whole bunch of non-performance-related reasons. It could be a wedding, a divorce, tuition at a private school, a vacation home, a Maserati, a professional pickleball franchise…

But a competent executive has only one reason for adding to what is likely already a large chunk of personal wealth tied up in company stock through options. And that’s that business is good, and getting better, in a way that’s not currently reflected in the stock price. The executive may be delusional, of course, and that’s something we have to factor in, but the information is the informed belief.

Leave a Reply

%d bloggers like this: