Tuesday, February 05, 2008

Investing Is a Game of Following Insiders?


That would mean making an ass out of you and me if I am wrong. :P

Assume that in a fantasy land, there lived a highly famed businessman named Sir MoneyMoney Cow who owns substantial shares of this company called Cows-R-US. Now during a corrective phase of the stock market, Sir MoneyMoney Cow decides to buy more of his company's shares from the market.


As a market investor, upon reading such news, should you follow?

The common reasoning put forward is that perhaps that the insider, Sir MoneyMoney Cow knows more than us. And from an insider perspective, perhaps he sees some reasoning why one should be positive about his company.

A valid set of reasoning?


Read an article of interest this morning.

  • If stock market losses create misery, at least we can take comfort that we all have plenty of company from the "smartest guys in the room."

    I'm talking about corporate insiders, those corner-office execs and board members whose moves many investors follow on the logic that their front-row seats make them the savviest market players around.

    These days, many of them look instead like the biggest losers -- at least on stock purchases they made last year that now look decidedly boneheaded.

    Sophisticated experts at places such as Citigroup (C, news, msgs), Bear Stearns (BSC, news, msgs) and Thornburg Mortgage (TMA, news, msgs) poured millions of dollars into banking and mortgage stocks right before the subprime disaster took those shares down. Those missteps cost insiders millions.

    And the biggest loss among the smart-money crowd belongs to billionaire Ronald Perelman, a director of lottery-equipment maker Scientific Games (SGMS, news, msgs). He's down $53.7 million on purchases of that stock last February and in December.

    "Do insiders know anything more than anyone else, and can they act on it?" asks Timothy Ghriskey, the chief investment officer of Solaris Asset Management, which manages more than $2.8 billion in assets. "This is evidence that they don't." ( Source: Insiders' 10 dumbest stock moves )


See in the above article, the writer has laid down proof that sometimes, insiders do get it badly wrong!

And here's stuff worth pondering upon.

It probably won't hurt them insiders as much as it would hurt you if they (the insiders) make the mistake. After all, it's pure vested interest when the insiders buy more shares. Yes, insiders do know more. Perhaps they might have more insights on the future prospect but from an investing perspective, are they really capable of understanding and valuing their own company?