I’m looking for a major change of my investment portfolio today, so today’s post will be short but sweet.
One of the lamest comments usually spoken by brokers who are gunning for commissions is:
- The insiders are buying their own stock.
- The insiders are buying because they know more about the stock then you do.
- Hence, you should buy the stock.
I have a friend who was once a broker, and he told me that this is the ultimate weapon in a broker’s arsenal to earn commissions. After all, who can verify whether or not the insiders really are buying? But the question is, can you even trust the insiders?
First of all, the insiders wouldn’t purposely leak out the fact that they’re buying. Everyone wants to buy at a lower price. The only time an insider would proclaim that he (or she) was buying is if the company were in serious trouble, and the insider wanted the public to stem the blood flow by buying its stock. Rumors tend to get overly exaggerated, so by the time the rumor gets to you, its scale might have been multiplied many times, and the truth completely distorted. So unless you heard first hand from an actual corporate insider that you trust, don’t believe the “insiders are buying their own stock” line. 99% of the time it’s used as a gimmick, and is false.
When insiders say they’re buying, it’s often used as an encouragement for other investors to buy. And that’s exactly what it is; encouragement. Like I said, insider buying is often used as a gimmick by insiders to fool outsiders into buying the stock.
Do insiders really know more about their stock than you do? Maybe. But remember one thing. Corporate insiders are exactly what they are, business men. They’re not investors. Just because the insiders know before hand that they’re earnings significantly beat estimates, doesn’t mean the stock will perform well in the medium term. Macro factors often affect individual stocks more than earnings and analyst estimates. Many well known corporate insiders bought their own stock in 2008, and they got killed in the ensuing continuation of the Great Recession.
You shouldn’t buy the stock because insiders are buying. Period. First of all, you don’t know for sure if the insiders really are buying. Most of the time the insider buying rumours are false. Second of all, insiders don’t know more about the stock than you do. Insiders are not investors, and frequently buy stocks at the wrong time.Third of all, always do your own research.
So what’s your view on inside buying? Also, thanks to Sinclair89 for raising an interesting point in the comments section.