A piece in Forbes looks at some ETFs that construct portfolios based on insider sentiment. In a broad sense, I think the idea makes sense, but I'd be very hesitant to buy or sell a stock based on insider trading for a few reasons:
- You might look to insider trades as an indicator of the executives' broad sentiment about the industry or company. But remember: they're not allowed to make trades when they're in possession of material non-public information (unless the trades were prearranged). So if you're buying stock because you think the CEO has some secret knowledge motivating his trades, remember this: you are buying stock because you think the CEO is a crook.
- As insider sentiment has become more carefully tracked by a variety of services, savvy executives and directors use it as a red herring to try to prop up sagging stock prices. If you see the CEO and the entire board of directors purchase a negligible amount of stock in a short period of time, it's pretty clear what happened. "John, our stock's in trouble, and shareholders are going to start complaining about how we paid ourselves $800 million while the stock went from $30 to 6 cents." "You're right, Kathy. Let's all take one day's worth of salary and buy a few thousand shares. That way people will realize that we're committed to the company and, while we're flooding the EDGAR database with Form 4s, we can also slip in the 8-K disclosing that we're being sued because our tricycles cause herpes."
