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Submitted by: Danny Noonan
Wealth Advisor, Carson Wealth
At Carson Wealth we use a 4-step process to manage your portfolio: 1.The creation of a sample portfolios based on asset classes we believe to be in a long-term uptrend (i.e. position ourselves in front of long-term trends). As Warren Buffet says, “Find a trend; throw yourself in front of it.” 2.Quarterly monitoring of portfolios in order to potentially optimize returns based upon the correlation coefficients of asset classes on rolling 20 year historical returns. 3.The use of a watchlist to monitor an eclectic group of "best-in-class," non-proprietary investment vehicles. 4.Utilization of two technical analysis software programs to improve buy/sell activity and monitor legal insider trading activity to enhance investment entry and exit decisions.
Today, we're going to focus on insider trading, and we'll focus on the remaining three steps in subsequent newsletters. Historically, when the stock market starts to soar, the masses are buying. When stocks are dropping in value with no bottom in sight, fear and panic set in, and the masses will sell. Simply put, too many individuals buy high and sell low. Company insiders do not necessarily follow this pattern. These are high-level executives or shareholders with a stake greater than 10%. Corporate insiders include directors, officers, chief executive officers, chief financial officers and others with financial or other non-public information that could affect stock price. Before the Enron scandal, insiders had 30 to 45 days to report to the federal Securities and Exchange Commission their personal purchases and sales of stock in the companies that employ them. Now they must report this information within two days.
One of the people we listen to on this subject is George Muzea, author of "The Vital Few vs. the Trivial Many: Invest with Insiders, Not the Masses," as he is an expert on this subject of insider trading. His book describes how insider trading can be a key signal to investors when deciding to buy or sell a stock. "Most insiders are not experts of the market, they are experts of their own company. They receive their information months before the public," says Muzea. Muzea does caution, however, that insider trades can also be misleading. The majority of insiders have no idea what causes their companies’ stock price to go up or down. When interpreting insider trades, it is important to filter out what is not significant. Directors are not necessarily the best indicators of a company’s stock trend. They may be directors of multiple companies and buy stock in them out of obligation or for appearance and sell out of need or mere speculation. Officers and CEOs could be better indicators, because they have a deep and detailed understanding of the company and where it is going in the next six months.
The CFO is often the best indicator of value. "It is important to watch the trading patterns of those who have been successful. Even if one insider with a great track record buys a stock and no one else does, this may be an indicator to buy," says Muzea. According to Muzea, insiders can be further classified into two groups, value and catalytic. Knowing the type of insider is one of the most important parts of your analysis of the stock. Value insiders invest when they determine the real value of the stock is less than the market value. This will help determine whether the stock you think is a bargain, really is. If it is, then the CFO, among other insiders, could be buying.
The exception to this rule is when insiders are buying to boost the stock price, better known as window dressing. If the insider had sold previously at higher levels, he or she should be buying back at least 25% of what they sell. Catalytic insiders buy during upswings. They may know news about their company six months into the future. If they've bought into upswings before, but abstain in a current one, it could well be a sign that this trend may not last long and is only a technical fluctuation. As with any financial indicators, there is no guarantee. No strategy can assure success or protect against loss. Securities offered through Linsco Private Ledger Member NASD/SIPC and An Investment Advisor
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