Why Buy What They Are Selling?

The use of insider data to find profitable buying opportunities is pretty well documented. It is one of the stock market anomalies like price to book value and momentum that has stood the test of time. The Niederhoffer and Lorie study that I mentioned yesterday came out almost 45 years ago and the data are as relevant today as they were then. Many anomalies are arbitraged away almost as quickly as they appear, but these data lasted. I suspect this is because they have to do with corporate valuation levels and human behaviors, which are two constants of the market arena.

Another anomaly that has lasted is the flip side of insider buying. Individual insider sales of stock are almost random in nature. A director or officer selling a block of stock indicates almost nothing about the future of the company or its stock price. The fact that an officer needs to raise cash to pay for his daughter's dream wedding or to diversify his holdings is not in and of itself predictive. However, the same studies that confirm the predictive nature of insider buying tell us that when several insiders sell in a short period of time, the stock is probably going lower. It I highly unlikely that a group of insiders all decide to diversify at the same time, or are all building dream houses in the same short time span. It indicates that they are aware of declining business trends or an overvaluation of their company's stock price....439 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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