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Rupert Hargreaves
Rupert Hargreaves
Articles (1054)  | Author's Website |

Insider Buying: The Evidence

Data from Tweedy, Browne shows just how instructional insider buying is for investors

May 23, 2017

Earlier this week I highlighted stocks that have seen a significant amount of insider buying over the past three months, as insider buying is widely considered a great indicator for management sentiment regarding a company’s outlook.

To build on this, I want to highlight the findings of several studies relating to the impact of insider accumulation on stock prices. These studies are published in Tweedy, Browne’s highly informative investing book titled "What Has Worked in Investing."

What has worked in investing

"What Has Worked in Investing" is practically an investment bible, put together by the asset manager to show clients the findings that have shaped its investment process over the years. Within the book, 50 studies are presented, approximately half of which relate to non-U.S. stocks, and covers everything from the impact of insider transactions on stock prices and why dividends are important to why value has tended to outperform growth.

The book considers the results of five studies which look at the investment returns of stocks purchased after insiders’ purchases. The five studies selected are as follows:

(1) Donald T. Rogoff, “The Forecasting Properties of Insider Transactions,” Diss., Michigan State University, 1964.

(2) Gary S. Glass, “Extensive Insider Accumulation as an Indicator of Near Term Stock Price Performance,” Diss., Ohio State University, 1966.

(3) Charles W. Devere, Jr., “Relationship Between Insider Trading and Future Performance of NYSE Common Stocks 1960 - 1965,” Diss., Portland State College, 1968.

(4) Jeffrey F.Jaffe, “Special Information and Insider Trading,” Journal of Business, July 1974.

(5) Martin E. Zweig, “Canny Insiders: Their Transactions Give a Clue to Market Performance,” Barron’s, July 21, 1976.

All of the studies show a similar result; the investment returns on stocks purchased after insiders’ buying are vastly superior to the rest of the market.

For example, in the first study, which looked at the returns on equities during 1958, insider stocks gained 49.6% compared to the market return of 29.7%.

The second study looked at returns between 1961 and 1965. During this period, insider stocks returned 21.2%, and the market returned 9.5%. Even though the third study considered the same period, results were even more impressive. This particular study looked at equity returns after insiders’ purchases between 1960 and 1965 and found an insider return of 24.3% compared to the market return of 6.1%. The fourth study looked at equity returns between 1962 and 1965 and once again found an outperformance of insider stocks of around 7.4% compared to the wider market.

The final study was the only one conducted after 1965 and looked at the returns on insider stocks between 1974 and 1976. Still, despite the different period, the results were the same. Insider stocks returned 45.8% over the period studied compared to the market return of 15.3%.

Not just the U.S.

The same effect is reported in other markets around the world. The book also considers two studies from the United Kingdom and Canada on the same topic. The U.K. study examined the performance of equities between January 1986 and August 1987 in which a company insider had made an open market purchase. The study assumed the same number of shares that had been acquired by an insider were acquired for the “buy” portfolio at the stock price on the day of publication.

The study found the return in excess of the market index (The Financial Times-Actuaries All Share Index) were as high as 53.05% for the longest study period.

The Canadian study looked at insider transactions pertaining to 111 large Toronto Stock Exchange listed industrial companies between January 1968 and December 1972. The sample consisted of 403 trades by all officers or directors who were also directors of a Canadian bank and 580 trades by officers and directors who were not directors of a Canadian bank.

The authors found that insiders who were also directors of a Canadian bank had an average excess return above a risk-adjusted market index of 7.8% per year. The surplus return for officers and directors who were not also directors of a Canadian bank was 3.8% per year.

Even though these findings are somewhat out of date, the trend is clear. Insider buying is an unyielding signal for investors.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website

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Stephenbaker - 2 years ago    Report SPAM

Are there any more recent or longer term studies?

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