When it comes to investing, Gina Moore thinks actions speak louder than words. The portfolio manager at Aronson + Johnson + Ortiz, a Philadelphia investment firm with $17 billion under management, says she doesn’t talk with executives of companies she’s investing in. Instead, she studies the amount of insider buying and selling of company shares. “Like most money managers, I think the quality of a company’s management is a key part of its investment performance,” she says. “But executives are always trying to sell you on their companies when you talk to them. Insider transactions signal where they really think their company is going without the corporate spin.”
In an environment where trust in Wall Street is possibly at an all-time low, insider knowledge is extremely valuable. Studies have shown that mimicking insider behavior has been one of the few consistent means of beating the market. The best-known academic research was published by a University of Michigan Ross School of Business finance professor, Nejat Seyhun, in his 1998 book, Investment Intelligence from Insider Trading. He examined insider activity from 1975 to 1995 and found that stocks bought but not sold by insiders outperformed the market by 7.5 percentage points, on average, during the 12 months that followed the insider purchases. By contrast, companies with insider selling underperformed the market by 6.1 points. Subsequent research has confirmed this insider effect not only on individual companies but also on the market as a whole: If insiders in aggregate are buying more than selling, it is bullish for the market, and vice versa.
(read more on BusinessWeek after the jump…)
