Stock Insider Trading
Includes insider buying and insider selling
Stock insider trading is a feature of the investment strategy of George Muzea, the author of the book The Vital Few: The Trivial Many
He describes an approach to investing that uses the buying and selling activities of company insiders to inform investment decisions.
One can define insider trading as trading carried out by company insiders, namely the directors and CEOs of companies.
In his book Muzea is referring to legal rather than illegal insider trading. Illegal insider trading refers to insider trading on information about the company that has been withheld from the market.
Insider Investment Strategy
Muzea's investment style is 'top down'. He buys both value and growth stocks but only if there is insider buying to support the decision to purchase.
He follows the 80:20 rule of the 19th century economist Vilfredo Pareto (the Pareto Principle) which, from a stock market perspective, he adapts to call the 'Vital Few and the Trivial Many rule'.
The 'Trivial Many' (the 80%) he sees as the stock market 'experts' and the people who follow them, and the 'Vital Few' (the 20%) as the officers and directors of companies.
His investment strategy is to use stocks bought by insiders when market conditions are favorable, namely when experts are negative about the market and insiders were positive.
The key to his strategy is to invest in the stock market when the 'Vital Few' are buying and the 'Trivial Many' are selling. He accepts that there would be periods when you would be out of the stock market.
Rather than ignoring the media, his advice is to keep an eye and ear on what they are saying and compare it to what you see yourself. It is also essential that you know what insiders, the most informed investors are doing.
Calculating the Odds
Knowing when the odds are in your favor is another important aspect of the stock insider trading strategy. He suggests that ways to do this include ...
- not using a 'buy and hold' strategy as it can't deal effectively with bear markets that come around every three or four years
- watching the calendar to find the periods of the year when the market performs better
- following the election cycle as this affects the performance of the market
- using the 200-day moving average to check for upturns and downturns in the market.
Mistakes that he claims are the main reasons investors lose money include ...
- not following the buying activity of company insiders
- following the advice of experts who appear in the media
- investing in the wrong months of the year.
He argues that our brains are not equipped to use the type of 'interactive reasoning' that investing in the stock market requires, and as a result we are 'born to lose' unless we follow the 'Vital Few' who are best informed.
Obtaining Insider Information
Through his company, Muzea provides research in this area to many analysts and investors. There is considerable interest in the investment community for the research he provides.
In the public arena, Yahoo! has a Finance section that allows the investor to select 'Insider' after you have entered a stock symbol. It provides insider data.
Also, from the 'Profile' link in Yahoo! you can select the option that provides you with the full list of insiders in the company of interest.
Muzea argues that knowing how long an insider has been with the company, when he or she has last traded, and what their position in the company is, can provide valuable clues to the importance of their stock insider trading.
The most important piece of information that Muzea would like readers of his book to take into account is to avoid or sell any stock that the insiders are selling when there is price weakness in the stock.
He suggests that avoiding big losers in the stock market is more important than picking big winners.
Because Muzea's insider trading strategy contains elements of contrarian investing - going against the crowd, it may have some appeal to value investors
I follow the buying and selling activities of company insiders, but exercise caution when using stock insider trading to inform my investing decisions.
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