- Insider trading data is undervalued.
- Profiting off the market is easy enough a dead person could do it (kinda).
- Beating the market is hard but insiders do it all the time.
If I had to guess, 2009 isn’t a year that stands out for many. Hiding in the shadow between the Great Recession and the European debt crisis, ’09 was pretty forgettable. Except for me. That was the year my grandma passed.
When she died we did what many families do — we grieved, celebrated her life and appreciated simple yet profound facts like we wouldn’t exist if she hadn’t. In time life went back to business as usual, albeit one down.
Fast forward seven years and I learned my old lady was quite the investor. In ’05 she bought into the S&P 500 (NYSEARCA:SPY) and held to the grave. As of May 2017 those shares are worth over 94% more.
Here’s how she did by the end of 2015:
Considering Dalbar’s Investor Behavior study (source of the orange and green lines above) my granny outperformed the average equity and fixed income mutual fund investor in all 10 years ending Dec 31, 2015. What’s more, according to the SPIVA® U.S. Scorecard, my dead grandma outperformed “82.14% of large-cap managers” in the same period.
By not touching her money she not only returned more than most but did so despite the following developments:
- 2006 – present: US debt grew 142%.
- 2007 – 2009: Value of US households and nonprofits fell 20%.
- 2009 – present: European debt crisis.
- 2010: Hedge fund hunger-games briefly vaporized a trillion-dollars in market value (while launching some stocks up 100,000%).
- 2011: Stocks fell globally after a U.S. debt downgrade.
- 2015: Stocks worldwide fell again when the Shanghai composite index dropped 38%.
It would seem my grandma was a Buffet disciple:
But there was one group of investors my grandma couldn't beat; the average large-cap insider (blue line in the chart above). On average business titans of the SP500 almost double the market’s annualized performance on a 10-year investment horizon.
Averages, however, can be deceptive. It’s more useful to see a distribution of those insiders’ returns. Doing that requires collecting millions of public records on insider trading, correlating purchase histories to stock prices, and then projecting what an insider would have made had they sold their purchases years later. Below is the fruit of such a labor (where insider ROI is compared to what anyone would have made had they invested in SPY every time an insider bought stocks).
The plot says the following:
- Although investing in SPY is safer than investing like an insider, it could have lost an investor almost half their money had they not held longer than five years.
- Nearly half of insider purchases beat SPY over ten years.
- Given the unit return per time-risk involved, investing like an insider may be more practical for hold periods of about three years.
These phenomena are explainable by three observations:
- As captains of their ships insiders know more about their businesses than anyone else.
- Insiders pay the best financial advisers the best money to tell them when to buy and sell.
- Despite their insight, insiders can make mistakes.
All considered, insider trading data is valuable. While past performance is no guarantee of future results, insiders know more about when and where to invest than just about everyone else. These people direct companies that make the cars we drive, clothes we wear, medicine we take, food we eat, and laws we’re expected to follow. Following their trading and occasionally investing in their companies when they do can be a viable way to improve overall returns.
And sure, that’s more risky than just investing in ETFs… but maybe that’s how to trade better than a dead lady.
Soon I’ll be publishing commentaries on insider trading as it happens. Follow me, TradeKeeper, to get updates about insiders who are beating the market.
When I talk about insiders I’m using the SEC’s definition:
An insider is defined as an officer or director of a public company, or an individual or entity owning 10% or more of any class of a company’s shares … Section 16(a), Securities Exchange Act of 1934
Learn more about legal insider trading here.
