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A trading strategy that I use: Insider Trading Model

Summary:
I use a few trading strategies at the same time to smooth out my portfolio’s returns. One such quantitative trading strategy is my Insider Trading Model. What is the Insider Trading Model As you may know, the stocks that corporate insiders (e.g. CEOs, CFOs) buy outperform the broad stock market. This is because no one understands their companies’ prospects better than corporate insiders, which enables insiders to profit from this information advantage. This is especially true during times of market turmoil when most traders react emotionally while insiders logically evaluate the facts. This is what would happen if, every single month, you bought the S&P 500 stocks that corporate insiders bought last month: Let’s call this the “Basic Insider Trading Strategy”. From May 2003 –

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I use a few trading strategies at the same time to smooth out my portfolio’s returns. One such quantitative trading strategy is my Insider Trading Model.

What is the Insider Trading Model

As you may know, the stocks that corporate insiders (e.g. CEOs, CFOs) buy outperform the broad stock market. This is because no one understands their companies’ prospects better than corporate insiders, which enables insiders to profit from this information advantage. This is especially true during times of market turmoil when most traders react emotionally while insiders logically evaluate the facts.

This is what would happen if, every single month, you bought the S&P 500 stocks that corporate insiders bought last month:

A trading strategy that I use: Insider Trading Model

Let’s call this the “Basic Insider Trading Strategy”. From May 2003 – present:

  1. Basic Insider Trading Strategy yields an average of 20.2% per year
  2. Buy and hold the S&P 500 (including dividends reinvested) yields an average of 10.1% per year

The Insider Trading Model is currently a work in progress. Instead of blindly copying the trades of corporate insiders every month, the model adds 1 trend following and 1 contrarian component to improve returns.

Insider Trading Model’s rules

  1. Every single month, buy the S&P 500 stocks that corporate insiders bought last month IF…
  2. the Basic Insider Trading Strategy’s 10 month average is going up OR the S&P 500 Insider Buy/Sell ratio was above 0.3 sometime in the past 6 months.
  3. Otherwise, do not buy stocks. Buy TLT instead (Treasury bond ETF).

In a nutshell, copy corporate insiders IF the trend is up, or if there is an overwhelming amount of insider buying (i.e. corporate insiders as a group are predicting a major stock market bottom).

A trading strategy that I use: Insider Trading Model

Performance

As you can see, this simple strategy for following corporate insiders SIGNIFICANTLY outperforms buy and hold for the S&P 500. From 2003-present:

  1. Insider Trading Model yields an average of 24.5% per year
  2. Buy and hold the S&P 500 (including dividends reinvested) yields an average of 10.1% per year

Improvements I’m making to the Insider Trading Model

I’m improving the Insider Trading Model by narrowing down the selection of stocks to buy. Right now, the Insider Trading Model buys every stock that insiders bought last month, indiscriminately.

Going forward, the Insider Trading Model will be more selective about which stocks to buy. In doing so, the Insider Trading Model’s performance will increase even further. My algorithm will focus on several factors that are proven to work e.g.

  1. Focus on CEO & CFO trades, ignore trades by large 10% shareholders
  2. Focus on multiple insiders buying the same stock within a short period of time (aka “cluster buys”)
  3. Focus on non-planned trades
  4. Focus on trades that significantly increased the insider’s holding in the company
  5. Focus on stocks with lower valuations
  6. Focus on insiders that have many years of experience working in the industry

Where can I find the Insider Trading Model’s latest trades?

The latest insider transactions can be found here. I will soon publish a webpage that hightlights the Insider Trading Model’s latest trades.

In the meantime, email me at [email protected] if you have any questions, and sign up to my email list to be notified of improvements to the Insider Trading Model.

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