Saturday, June 2, 2007

Selecting Stocks With Insider Trading

My friend Freddy has been researching different kinds of stock screens. One measure of a stock that we discussed was Insider Trading. When someone involved in the critical workings of a company buys its stock, good things seem to happen.

The notion is that an insider wouldn't buy stock in their own company unless they were confident the price would go up. I'm skeptical of the predictive abilities of humans -- especially executives. Still, I hear that you can find statistical evidence to support the idea. When insiders buy, the stock becomes more inclined to go up rather than down. Or so they say.

When I buy stock, I look for a dividend, a P/E ratio of 15 or less, and debt less than 50% of market cap. That's about it right now. Not that I'm terribly successful or very committed to picking stocks. Most of my exposure to stocks comes from Index funds and my 401k mutual funds. Don't mistakenly think that I'm a great stock picker or that I've even tested insider trading as a screen.

I am tempted though. Screening stocks for insider buying isn't hard. Freddy sent me this site: It seems to have all the data needed. One interesting trend I noticed from this site is that buying occurs an order of magnitude less frequently than selling.

Suggestive, isn't it? I find it amusing that so many folks defend exaggerated executive salaries when it seems most executives seem reluctant to keep their money in the organizations they run. Yes, I suppose they have some excuse. They don't want all their eggs in one basket. They need new vacation homes and fast cars. I understand, but I'm still jealous. And skeptical.

Leave a comment if you have experience with using insider trading as a stock screen (no investment spammers, naturally).

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