Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on how you can make the best investments for your portfolio. Each Investor Toolkit update gives you a fundamental piece of investment strategy, and shows you how you can put it into practice right away.
Tip of the week: “Insider trading is just one indicator when you’re looking for the best investments”
The value of insider buying and selling as a market indicator seems self-evident. After all, company insiders — officers, directors, or owners of 10% or more of a company’s stock — are apt to know more than outsiders do about what’s going on in their business.
Many advisors claim that they can find the best investments by studying insider data. But the deeper you look, the more you’ll find that this data leads to muddled conclusions at best. That’s why insider trading is only one aspect we consider when we’re looking for the best investments to recommend in our newsletters and investment services.
Not all insiders have equal knowledge. It would help if you could categorize the clout that each insider has within the organization. You’d expect the CEO to have a better overall picture of things than the CIO (the chief information officer, who keeps the corporate computers running). You’d also want to grade the size of the transaction in relation to the insider’s personal wealth, and in relation to his or her stake in the company. You would also want to weigh the insider’s investing skills.
Of course, if you look at insider trading data that closely, you’re down to a case-by-case basis. While you’re at it, you might as well look at whatever else you can find out about the company. That’s what we would recommend in any event. But it defeats the labour-saving purpose of using an indicator to find the best investments.
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Insiders’ perception can be just as skewed as outsiders’. It pays to remember that insiders can delude themselves about their employer just as easily as outsiders. As well, 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.
Our investment advice: 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.
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 the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities).
This may cut the excitement, but it will increase your long-term returns.
You can get our latest analysis, including our clear buy/sell/hold advice on dozens of Canadian stocks you may be considering buying in The Successful Investor. What’s more, you can get one month free when you subscribe today. Click here to learn how.
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The Successful Investor Inc. and its affiliate Successful Investor Wealth Management (referred to hereafter as TSI Network) know that you care how information about you is used and shared, and we appreciate your trust that we will do so carefully and sensibly. This notice describes our privacy policy. By visiting websites owned by or associated with TSI Network, you are accepting the practices described in this Privacy Policy.
This privacy policy is applicable to all TSI Network Visitors, Clients, Employees, Suppliers, Web sites, Management, and all other interested parties. Any links to or from our site are not covered by this policy. We encourage you to read the privacy policies of every site that you visit.
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Legal Notices and Disclaimers
The contents of this web site and our publications are based upon sources of information believed to be reliable, but no warranty or representation, expressed or implied, is given as to their accuracy or completeness. Any opinion reflects the Successful Investor’s judgment at the date of publication and neither the Successful Investor, nor any of its affiliated companies, nor any of their officers, directors or employees, accepts any responsibility in respect of the information or recommendations contained in the publications or on this web site. Moreover, the information or recommendations are subject to change without notice.
Information presented on this web site or contained in our publications is not an offer, nor a solicitation, to buy or sell any securities referred to on the web site or in the publications. The material is general information intended for recipients who understand the risks associated with an investment in any securities referred to in the publications or on this web site. The Successful Investor has made no determination regarding whether an investment, course of action, or associated risks are suitable for the recipient.
