Why do some investors have tremendous success while others struggle? In short, investors fail because they either aren’t using a proven strategy or can’t adhere to it, instead buying and selling on instinct, a great story or some equally unreliable technique. But your investment strategy should be based on a proven investment philosophy.
As an example, take the proven strategy of using the details of insider buying of Continental Resources (NYSE: CLR) one of the US top 10 independent oil producers. The company is the largest leaseholder and producer in the country’s premier oil field, the Bakken play of North Dakota and Montana. The firm used the latest advanced technologies to find and produce oil and gas and last year, we analysed that the valuation was cheap. But an even better and additional good reason, was that Continental founder and Chairman of the Board Harold Hamm had purchased 346,486 shares, an investment of $12.6 million, of his own company’s shares. In fact, he was a regular buyer and owned over 80% of the outstanding shares.
At this time, Continental was undervalued at 2.3 times book value and only 16 times prospective earnings but Hamm’s ownership interest and recent purchases told you all you really needed to know. Just 3 1/2 months later, the stock is up nearly 40% versus 2.5% for the S&P 500.
The strategy is based on insider buying. And there is a lot of evidence that following insiders is a successful strategy and works. Multiple studies and a lot of personal experience have shown that when a company’s shares are under heavy accumulation by its officers and directors, they generally outperform the market by a significant margin. The strategy requires a bit of due diligence about who is buying how much, at what price and when. But the main point is that corporate insiders have access to material, non-public information about the future prospects of the business and that gives them an unfair advantage when they go into the market to trade.
History shows that investment outperformance comes from evaluating businesses and not outguessing the market. Use a fact-based, logical and rational approach instead of day trading, buying hot tips, not knowing what you really own or why. Before you invest in any recommendation, make sure it’s based on a dedicated system, a proven philosophy and a valid sensibility. Combine these with a proven sell discipline and only one further step is required: The discipline to follow through!
Sven Franssen