Tuesday, October 18, 2011

"Most investors say: 'Don't take risks.' The rich investor takes risks." --Robert Kiyosaki

DO AS THE INSIDERS DO (October 18, 2011): I am always surprised how few investors simply mimic what the world's top executives are doing. If you don't know what to do, why not copy those with the longest and most successful track records? When corporate insiders were first faced with the possibility of having to publicly reveal their purchases and sales of all shares of their own company stock, including precise purchase prices, quantities traded, and quantities held, they resisted mightily because they feared that amateur investors would eagerly follow their lead. However, they had no reason to fear, because 99% of investors don't realize that this information is publicly available in a timely fashion, and the 1% who know about it mostly don't understand how to use it.

I have signed up for the free 10 p.m. e-mail from http://j3sg.com/ . I scan this every night to determine if a significant number of insiders within a given industry sector are all buying over a period of a few weeks or less. For example, if executives of numerous coal-mining companies have been buying their own shares, then this tells me that it is probably timely to purchase shares within the same equity subsector--or I can buy the exchange-traded fund KOL. Similarly, if insiders of several sea-shipping companies have been aggressively buying their own shares, then I will consider buying SEA. As always, I only act when there is significant fear as measured by VIX at 40 or above, and only when there have been meaningful outflows from equity retirement funds as the least knowledgeable investors--sort of the opposite of insiders--have been selling. Most investors in 401(k) and 403(b) retirement accounts are only managing their money because their employers refuse to assume that important responsibility; they have no idea what they're doing and have been consistently losing money for decades. In other words, if the country's richest shareholders are buying while the poorest shareholders are selling, I figure that the rich will get richer while the poor will get poorer. I therefore do as the rich folks have been doing. It may not sound brilliant, but intelligent investing is more about common sense than genius.

From August 8, 2011 through October 4, 2011, there was substantial buying of equities by top executives in general especially near all of the lowest points for their respective share prices. This was one important reason that I did likewise in the late summer and early autumn near all important market bottoms. During the past week, there has been virtually zero buying or selling by top executives. This tells me that it is too late to buy unless prices decline further and executives once again accumulate their own shares in substantial quantities. Similarly, it is too early to sell until insiders are doing likewise. In the first few weeks of July 2011, insiders demonstrated an all-time record ratio of selling to buying. We may not regain those extremes, but surely we will experience a notably above-average ratio of selling to buying by top corporate insiders whenever it is timely to unload the equity funds which I had bought in the late summer and early autumn. I will most likely purchase TLT, a fund of U.S. Treasuries averaging 28 years to maturity, and similar safe-haven assets whenever such securities become especially depressed during the next several months.