Take a Look "Inside"
Editor's Note: Chief Investment Strategist Alexander Green believes following insider buying is one of the best ways to invest.
Who would disagree? Company executives do all the heavy lifting for you!
Today, Research Analyst Matthew Makowski talks about the ins and outs of insider buying, what's legal... and what isn't. Alex makes following insider buying even easier for you in his VIP Trading Service The Insider Alert. The service tracks thousands of insiders... in particular, the "Wall Street Underground" who have never lost money trading their own companies.
And you can follow in their footsteps. See you on the inside!
- Donna DiVenuto-Ball, Associate Club Editorial Director
Insider trading doesn't have a great connotation.
Martha Stewart (or M. Diddy as she was known in the slammer) and current halfway house resident (and former Enron CEO) Jeff Skilling are the usual suspects who come to mind. They're seen as slimy and dishonest for making money on inside information.
But in reality, anytime a CEO, board member or management-level employee of a corporation buys shares of the company they work for, they're often buying on information not yet widely known to the public. And contrary to popular belief, it isn't (usually) a crime.
When an insider changes their holdings in a company - that is to say, whenever they buy or sell any associated stocks, bonds or options - they must file a simple, two-page document (called a Form 4) with the Securities and Exchange Commission (SEC). This form is kept in a massive database on the SEC's website for anyone to see.
The SEC database can be a treasure trove of useful information for the savvy investor because it hints at secrets the general public isn't privy to.
Think about it... If a CEO buys 10,000 shares of the company she runs right before an earnings announcement, we can make a pretty informed prediction about the direction that stock is heading.
That CEO knows something most investors don't... And that information is a very valuable commodity. It's about as close to looking into a crystal ball as you can get. (We're still working out the bugs in our crystal ball technology here at Investment U.)
With hundreds of Form 4 filings every day, it's a nightmare to weed through and find valuable information. (If it were easy, everybody'd be doing it, right?)
There are some exchange-traded funds (ETFs) that do the heavy lifting for you, however. Take the Direxion All Cap Insider Sentiment ETF (NYSE: KNOW), for example. This fund's index uses public information about the trading activity of companies' directors and officers to pick 100 stocks from the S&P Composite 1500 Index.
While there's more to it than that, it's essentially a down-and-dirty way to follow the "smart money" in the stock market. And as you can see in the chart above, it's outperforming the broader markets by almost 18%.
To help put this strategy into perspective and explain why this ETF is performing so well, a joint study by Harvard and Columbia universities found that insiders routinely make market-beating returns.
Another study from the University of Michigan concluded that insider purchases have "abnormal returns." And a study by the Wharton School of Business determined, "Investors can reap 'exceptional' profits by imitating insiders."
While trading ETFs is a perfectly acceptable way to follow the smart money, there's an even better way.
The Oxford Club's very own Chief Investment Strategist Alexander Green tracks the best of the best when it comes to insiders. He's even found a group called the "Wall Street Underground," with literally perfect trading records.
Subscribers to Alex's Insider Alert have been reaping the rewards of his research for years. And they've been collecting huge gains in the process... even when the markets turned sour in 2008.
They say imitation is the sincerest form of flattery. But imitating insider investors could be the sincerest way to beat the market and be on your way to financial freedom... all while staying out of jail.
Take that, M. Diddy.