Discussion on Insider Selling / Insider Buying

Today, in the SMIF meeting(@UTD) we had a good discussion about Insider trading and the merits / demerits of basing investing decisions based on that.

There were 2 positions. One position was that if the insiders are selling more shares overall recently, then that is a point of concern. That is a valid point. However, I think that alone should not sway investing decisions one way or the other.

My opinion is that Insider selling should be looked at. However, you should look at the % of Net shares sold as well as the Insider holding % itself. Consider an example : Insiders own $800M worth of company stock ABC. They sell $35M worth of stock. Sounds like a big amount. Well, considering that they continue to hold $765M worth stock, it seems like they may be diversifying or selling to buy a huge house (they can afford to) or for any other reason. They are not dumping shares in entirety. You should however keep an eye on this to see if this is a regular pattern.

On the other hand, I firmly believe that if Insiders are buying shares of the company, that would be a positive signal.

In fact, one of the greatest investors of all time, Peter Lynch, said

“Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”.

What this means is insider selling is relatively non key. Insider selling does not necessarily mean that the price will go down. However, Insider buying should be given more importance as that means they think the price will rise.

An excellent link is http://www.investopedia.com/articles/02/061202.asp

About Adib Motiwala

Portfolio Manager at Motiwala Capital LLC
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