It was George Soros that said, “there is no amount of money too big to bet when you know you are right.” It’s the holy grail of investing. The trade that we are all looking for.  One where we can leverage up and bet the farm.  It’s the time when you shove all the chips onto the table and tell the croupier you’re betting it all on 00. There is no investor with more conviction than a corporate insider betting big on his own company’s stock.

Of course, betting the farm is the most dangerous type of behavior for an investor to have.  You would have never heard of George Soros if he was wrong. But he wasn’t. Soros managed to beg borrow and leverage every dollar he could to bet $20 billion on what he saw as the inevitable devaluation of the pound.  And if he was wrong, he would just be another broke belly up trader you’ve never heard of.  John Paulson made $9 billion betting against the triple AAA credits of the CMO market by shorting credit default swaps, selling them at par on huge leverage and then watching them go to zero.  If he was wrong, it would have been a complete loss of his and his investors’ money-$600 million down the drain, as the swaps have a finite life.

Traders wait a lifetime for that high conviction trade and many never find it and the few that do find it are mostly too timid to go for the brass ring.  It’s a proven statistic that the fear of loss greatly outweighs greed. Think Thinking Fast & Slow by Kahneman or Michael Lewis’s The Undoing Project if you want the proof.   We are always on the hunt for that ever-elusive high conviction trade. In this blog, we examine the companies that report earnings week ending November 1.  Stocks make explosive moves on earnings and if you really have the conviction and the cojones, you may make multiples of your investment in a single day.

One of the things we look at is the material nature of the buying. For example, a billionaire buying $100k of his company’s stock might be the equivalent of your or me buying $10 worth. That’s in part why we look at the % Change in holdings.  Take a look at VP  Donoghoe  at AbbVie.  He stepped up his ownership by 135% when he bought 7525 shares on August 29th. Director Austin bought $4.285 million more than doubling his holdings.  AbbVie insiders show conviction.  The companies with insiders who look like they have conviction besides AbbVie are AGNC, BG, CNX, CI, CYH, and MD.

We left out Beyond Meat because the insiders know its a hot IPO and the stock is going to go public at a far higher price than what they are paying for it.  Not much of a risk there.  We also don’t pay much attention to insider buys that involve less than $200k.  This is as much a qualitative screen as it is quantitative. It’s important what you pay. Many of these names have risen sharply in price since the insider buy.  Corteva was a spin-off from DowDupont. Several insiders bought shares.  Peter Lynch, the legendary portfolio manager of the best performing mutual fund of all time, the Magellan Fund, loved spin-offs.  The jury is out on this one but the chart looks like a good bounce could be had.

Insiders sell stock for many reasons, but they generally buy for just one – to make money. THE INSIDERS FUND invests in companies at or near prices that management has been willing to invest significant amounts of their own money in.  After all, who knows a business better than the people running it?  You’ve always heard the best information is inside information.  This is as close to “insider information” that an ordinary investor is likely to see- and it’s entirely legal.  Officers, directors, and 10% owners are required to inform the public through a Form 4 Filing any transaction, buy, sell, exercise, or any other with 48 hours of doing so. This info is available for free from the SEC’s Web site, Edgar, although we subscribe to the Washington Service as they provide a way to manage and make sense of the vast realms of data.

As a rule, we only look at material amounts of money, $200 thousand or more, as anything less could just be window dressing. The bar is different from selling because the natural state of management is to be sellers. This is because most companies provide significant amounts of management compensation packages as stock. Therefore, with selling, we analyze for unusual patterns, such as insiders selling 25 percent or more of their holdings or multiple insiders selling near 52-week lows. Another red flag is large planned sale programs that start without warning. Unfortunately, the public information disclosure requirements about these programs referred to as Rule 10b5-1 is horrendously poor.  I also generally ignore 10 percent shareholders as they tend to be OPM (other people’s money) and perhaps not the smart money we are trying to read the tea leaves on.

Of course, unintuitive as it may seem, insiders can also be wrong about their Company’s prospects, they can easily be wrong about how much others will value them, and in many cases, maybe most cases have no more idea what the future may hold than  you or I. In short, you can lose money following them.  We have and we curse aloud, what were they thinking!  Needless to say, past good fortune is no guarantee of future success. We may own positions, long or short, in any of these names and are under no obligation to disclose that. We welcome your comments on our analysis.

This blog is solely for educational purposes and the author’s own amusement.  Investing with The Insiders Fund is for qualified investors and by Prospectus only. Nothing herein should be construed otherwise.  To learn more about our strategy, visit our website.

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