What will you do after a stock market crash? Some people will sell their stocks in a panic, some will just wait and pray for the stock market recovery. Have you wondered what the savvy investors are doing now? In particular, what the “insiders” are doing?
In the past few weeks,
- George Soros bought 1.13 million shares in Peabody Energy & 553,200 shares in Arch Coal
- Warren Buffet invested USD 1.14 billion in Philips 66
- Carl Icahn bought 88 million shares stake in mining & oil company Freeport MaMoRan
I am able to know these transactions not because I have the connection with these financial superpowers. It is because that these savvy investors are the major shareholders of these companies, which makes them the “insiders”. And by law, these transactions must be publicly disclosed.
If you ever thought stock investing is a fair game, you are wrong to start with. You see, there are different kinds of savvy investors, professional traders, fund managers, investment institutions, etc. But the ones who know the companies the best, the one who has the most vested interest in the stocks they invest are the “insiders”. And these are the people you should keep an eye on.
Today I will share with you a simple way to find what the insiders are trading and how you can benefit from the information.
Who are insiders
An insider may be a director or senior officer of a company or any person or entity that beneficially own a large percentage of a company’s share. A recent newspaper article unveiled that the insiders in Singapore are spending millions of dollars on snatching up their own company shares amid recent market slump.
- Mr Wee Ee Chao, managing director of UOB Kay Hain, spent about $868,000 to buy 620,000 shares in UOB Kay Hian following “Black Monday“. He also spent $3.3 million on 542,000 shares in UOL Group, where he is a non-executive director.
- Mr Ron Sim, founder and chief executive of Osim International, bought about 2.19 million shares in the massage chair retailer at a cost of about $3.2 million. He also spent about $680,000 to buy 733,000 shares in Perennial Real Estate Holdings, where he is the vice-chairman and non-executive director.
- Property and hotel tycoon Koh Wee Meng invested about $200,000 for 1.05 million shares in the residential developer Fragrance Group, and $108,000 on 360,000 shares in hotel operator Global Premium.
Insider Trading is not necessarily illegal
One big misconception about insider trading is that it is always illegal. In fact, insider trading is legal once the material information has been made public, at which time the insider has no direct advantage over other investors.
In fact, there is no need for the insider to “hide” material information from the public. In a world overloaded with information, the material facts are just buried in the seas of financial disclosures and there is no way for retail investors to tell which is important and which is not.
Why insiders buy
If you are director of a company selling bread, nobody knows better about the company than yourself. Imagine that you have just done an evaluation of the company and you know your company is worth $1 per share.
Suddenly there is a stock market crash and your company’s stock is trading at 80 cents. You know it is just a market correction and it is time to buy stocks at a bargain price.
Now you have the option to buy some other company’s stocks or your own company’s stocks. Which one would you choose? And to me, if the director is willing to put his own money into the company he manages, it is more convincing than any good words he can say.
Of course, the same thing goes when the insiders sell. Before Sino Forest’s stock collapsed, the directors have already started unloading their shares. There are countless examples like this. Unless you are the firefighter, you should not run into the building with a fire right?
How to find insider trading information
I use to try to decipher company disclosures and announcements via SGX website. but unlike their StockFacts, the website is really 80s and hard to use. I figured I am better off to pay for ShareInvestor WebPro to save my time.
ShareInvestor has evolved many times and now they have 2 plans:
- WebPro – for retail investors, fundamental approach investors
- Station – for active investors, chartists, technical analysis traders
Step #1: Select Insider Trades from Fundamental Menu
Step #2: Select the company you want to check.
You will land on the latest insider trades page. From here you can see some Directors or CEOs are buying and some are dumping their own company shares. As mentioned earlier, if you are the shareholders of a company where the directors are dumping their shares, your antenna should be up immediately.
Like I recommended in my earlier post, you should always have a watchlist when market conditions are a lot more benign. Let’s say you are watching UOB Kay Hian, Filtering by the stock counter, you can see Wee Ee Chao has been buying the stock in the past days non-stop.
You can also mouse over the Notes button on the right to see more details about the transaction. Sometimes it may be due to management exercising their stock options instead of buying from the open market. And that is a more complicated scenario.
Step 3: Stay updated with insider trading activities
Now you have it. However, it is still tedious to check this one by one. If you are watching a few stocks, you can simply add them to Portfolio Manager and all insider trades will appear in Related News as “disclosure of interest or changes in the interest of substantial shareholders/unitholders”.
You can even have all these information right in your inbox. You can set up to receive an email daily, summarizing all the announcements and activities of the stocks under your portfolio.
Insider Trades have no guarantee of a stock’s future performance
As much as we wish we have found the holy grail of stock investing, a stock indicator is never as easy as it seems. A good example is Noble. After being attacked by Iceberg and since earlier this year, there are significant major shareholder buying activities. However, the share price is just on a free fall.
Nevertheless, I typically view a collective insider buying activities across the market as a good indicator. After all, that is what I called “smart money”. “Pay attention to the smart money, be an insider” is the Principle #2 in my investment philosophy.
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And I have a challenge for you: go to retrieve the list of your current stock holdings, or take a look at your stock watchlist if you have not invested, check out what the insiders are doing in these companies. I am sure you will discover something interesting.
What are your discoveries? Comment below and share with us.