Legitimate reasons insiders might sell

There are plenty of legitimate reasons insiders might sell that have nothing to do with the near-term prospects for the business. They could have a high overhead to cover, diversifying their portfolios, paying for an expensive private school, buying a second home or sell half of their shares due to a divorce settlement. Plenty of legitimate reasons why insiders might sell but the company they run is still in good shape.

Investors often panic when they realize how much insider selling is going on at the companies they own. Often their fears are unfounded. However, sometimes there are good reasons for concern, particularly when insiders are selling heavily into a declining share price. If this happens, alarm bells are ringing because officers and directors who manage the company want to get out, at any price.

While top executives know a great deal about the companies they manage, they don’t know what the overall market will do. And while heavy insider buying is occasionally an indication of a market bottom, widespread insider selling is rarely a sign of a market top. So, market timing doesn’t work. Insiders can’t time the market any better than anybody else.

But turn the equation around. Why would lots of insiders buy significant amounts of their own company’s stock with their own money at current market prices? Because based on their experience and inside knowledge, they believe the shares are cheap and good long term value.

Bottom line: Insider selling at specific companies is a mixed bag. But heavy insider buying is a highly significant indicator. Ignore the market forecasts and forget about timing. Instead, focus on companies where the officers and directors are investing big sums of their own money in the companies they manage.

Sven Franssen