Insider buying is when someone who works for a company purchases shares of the company’s stock. Executives of a company are mandated to report their activity to the SEC, which means the world has access to a record of their purchases. Consequently, insider buying transactions are watched by many investors and used as one way to determine if a stock is a buy or not. (Note: I’m not talking about insider trading.)
It’s not out of the ordinary to hear a case be made for a stock because of increased insider buying. The thought is that if the executives of a company are putting their money behind the company stock, they must know favorable conditions are at hand. This might be true, but I do not think it’s wise to use insider buying as a short-cut when determining if you should or should not buy a stock.
I’ll convey the point through a personal story. I couple years ago I was employed by a regional bank in California. The bank was owned by a holding company, which was housed in the same building I worked in. Many of the executives in the company were very involved in purchasing company shares, yet within a few years the company went from the teens to $0.
The truth of the matter is the company gradually declined and was sold by the FDIC to another regional bank. What did these company executives see that others could not? Whatever it was, if anything at all, it turned out to be very wrong. The increase in insider transactions at the end of the day meant nothing to those attempting to get an edge on a prospective stock.
That’s one example. Other examples are out there. The point of the matter is that you should not put too much weight on an increase in insider buying. It’s great that company execs are buying stock, but that doesn’t mean abandon your research. Reporting on insider transactions is easy for reporters because it’s public and straight forward. Such reports also spike the interest of many observers who believe the information to be highly insightful. My argument is that it does not hurt to look at insider transactions, but do not throw every other piece of information aside and follow blindly.
I honestly do not take into account insider transactions when investing. If I come across the information I’ll give it some thought, but I do not typically seek out the information. I’d be interested if any readers currently use insider transactions as part of the stock selection strategy? Though I’m pretty dismissive of the information, I’m always open to learning new angles to approach stock research and selection.