Profit legally from insider trading.
It was the first week of March 2009 when I received an email from a friend asking me to check out a company called Culp (CFI) that made furniture upholstery and mattress fabrics. Having endured one of the worst bear markets since the great depression and watching every asset class drop simultaneously, my appetite for starting a new position was low. I listened with skepticism, especially because shorting furniture companies was one of five themes I had listed in September 2007 to hedge a long only portfolio.
As a passionate value investor I had a checklist that I ran every new investment idea through to figure out if it was worth exploring further. One of the items on my checklist included reviewing recent insider trades. When I checked out insider transactions for Culp (CFI), I noticed that insiders had started buying the stock in December 2008 when it was trading as low as $1.61 per share. In the span of three weeks, four members of the management team including the Chairman, the CEO, the President and the CFO along with two Directors had purchased shares on the open market. Even the wife of Chairman Robert Culp III decided to buy some shares.
These insider purchases continued until the Fall of 2009 even as the stock price more than tripled. The stock eventually went on to become a “ten bagger” (a term Peter Lynch used to describe stocks that had returned more than 10 times their original investment) and peaked just over $16 in the first quarter of 2010.
This little experience made me rethink my investment philosophy and was the spark that kindled my interest in event driven investment strategies such as Insider Transactions and Merger Arbitrage, eventually leading to the launch of this site.
Outperformance of an Insider Trading Strategy:
Company insiders are required by the U.S. Securities and Exchange Commission (SEC) to electronically file a form called the Form 4 listing their insider purchases and sales within two business days following an insider transaction.
Over four decades of academic research has shown that by following in the footsteps of company insiders and buying the stocks that they are buying, you can outperform the market by 6% to 10.2% per year.
While this may not seem like much, $100,000 invested in the S&P 500 index on January 1, 2001 would have grown to $115,640 after a full decade, achieving an annualized rate of return of just 1.48%. However the same $100,000 growing at a 11.48% annualized rate would have nearly tripled to $296,462, a difference of $180,822 on a $100,000 investment.
With the instant dissemination of information over the last decade, the edge offered by this strategy may have dulled a little but it still unearths interesting companies to research that I may not have otherwise come across.
This website does not tell you what to buy or sell but generates ideas for further research. We do so through,
- a post called Insider Weekends that you can receive by email every weekend that shows the top 5 insider purchases and sales from the prior week
- lists of all insider purchases and sales that are updated every few minutes
- the ability to search for insider transactions for a specific company or by a specific insider
- the ability to set up alerts that notify you by email about insider transactions that meet criteria specified by you