Insider buying can be a sign of investing value, but a lack of insider integrity can be a sign to sell as soon as possible

There are different ways of looking at insider buying and selling. In some cases, insider buying may signal growing value in a company. Pay attention too to insider integrity. That could signal a time to sell.

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Insider buying is just one of many signs of investing value in blue chip stocks

We think it’s a mistake to put too much weight on insider buying, since insiders can delude themselves about their employer just as easily as outsiders. However, it pays to remember that insiders may sell for a variety of personal reasons that have nothing to do with the company. On the other hand, insiders only make substantial buys for one reason—they think the company has attractive investment appeal.

Everybody wants to find the financial philosopher’s stone: the foolproof market indicator that can tell you when or what to buy or sell in 10 minutes a day or less. They will never succeed, because no such indicator can ever exist—not even insider buying.

By design, market indicators restrict the information they include to a narrow range, and reject everything else. The market responds to virtually anything that can influence the business of a company or the economy, though its focus constantly shifts.

That’s why we say investment success flows from mainly investing in well-established companies and spreading your money out across most if not all of the five main economic sectors.

This may cut the excitement, but it will increase your long-term returns.

Investing value: Sell if you doubt the integrity of insiders

We’ve always believed that investors should sell a stock if they have any doubts about the integrity of the people who are in charge of the company. In other words, if you think a company is run by crooks, you should sell the stock right away, no matter how attractive it seems as an investment. As the Madoff scandal so clearly showed, there are no limits to the ways in which unscrupulous operators can abuse and cheat you if they are inclined to do so.

Over the years, we’ve refrained from recommending, or advised selling, a number of stocks, including blue chip stocks because we felt their capital structure or promotional materials were designed to make it easy for insiders to mislead or take advantage of the investing public. We didn’t miss much as a result; in fact, we sidestepped some ugly situations.

To profit from this rule—that is, to use it to enhance your long-term returns, not just avoid losses—you need to apply it in a moderate fashion. You need to distinguish between lack of integrity on one hand and naiveté, or poor judgment, on the other.

For example, many public companies, and even some blue chip stocks, eventually run afoul of tax rules or regulatory decisions. But if you take that as a sign of low integrity, you can wind up selling solid investments at market lows.

Bonus Tip: Practicing patience, not reactionary behavior, is a form of investing value

It’s all too easy to sell a blue chip investment that looks like it’s headed for a downturn, only to buy another that is headed for a collapse. For that matter, if you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks way too early.

You can always find a rationale for selling. Market commentators are continually thinking up new ones, based on recent market strength or weakness, historical market patterns, political or economic predictions, changes in tax policies—the list is endless. This is a good thing. After all, you can only buy a stock if somebody who owns it wants to sell.

Before you act on a selling rationale, take a broader look. Consider facts about the blue chip investment, and about your investment goals and temperament. If the selling rationale makes sense and you find additional good reasons to sell, then selling may be the right thing to do. But it’s always a bad idea to sell a good stock for trivial or transitory reasons.