An Investment Strategy That’s Outperformed The US Stock Market By 16%

An Investment Strategy That’s Outperformed The US Stock Market By 16%

over 3 years ago3 mins

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Earnings season often sees investors get busy chopping and changing their portfolios in response to company updates. But one often overlooked yet market-beating investment strategy can help investors get ahead of the news – and profit whether it’s good or bad 😎

What does this mean?

Monitoring the trading activity of “insiders” – individuals with more information about a company’s activity than a typical investor – is a simple way to gauge the mood of that firm’s top employees and investors. And such insights have historically proved valuable.

Data from financial analysis tracker TipRanks going back to 2009 shows that an investor who’d bought and sold in line with the most senior US company executives’ own buying and selling of their firms’ shares – and then held that position for one month before cashing in – would’ve made a 25% annualized return excluding transaction costs. That’s 5% higher than the annualized return of the S&P 500 over the same period.

The performance of the investment strategy tracking C-suite insiders' transactions
Following the inside track only lost money in two out of the last 10 years (Source: TipRanks)

What’s more, a similar approach focused on “major events” would’ve earned investors a 35% annualized return since 2009, beating the S&P 500 by 16%. Rather than tracking top execs’ trading, investors using the major events strategy buy and sell based on what a company’s largest shareholders are doing 👣

The performance of the investment strategy tracking major investors' transactions
Tracking major investors’ transactions is even more profitable than copying executives’ (Source: TipRanks)

Why should I care?

In practice, investment strategies don’t often work in isolation – and monitoring insiders is no different. For safety’s sake, this methodology’s best used as part of a broader framework. Still, it can bring you key clues about how confident a company’s leadership team and biggest backers are in its near- and mid-term prospects. Who, after all, would sell shares they expected to rise in value before too long?

Unfortunately, the answer is, sometimes, company executives. As senior workers are often partially paid in share options, they may (without getting too into the mechanics) end up selling stock for reasons unrelated to their feelings about the company’s performance – potentially sending out misleading signals 🤦‍♀️

In a similar vein, regulations aimed at preventing “insider trading” – illegal attempts to profit from non-public information – afford senior execs such limited windows in which to buy and sell shares that transaction data can end up skewed to the point of near meaninglessness…

What can I do?

Have no fear: the TipRanks data above suggests that the average insider trade can be a guide to potential profit. And in terms of recent significant data, TipRanks’ screening tool flags investment bank Morgan Stanley as attractive: its biggest investor, Japan’s Mitsubishi UFJ Financial Group, recently increased its stake further 👀

Morgan Stanley's share price over the last six months
Has MUFG bought the recent dip in Morgan Stanley’s shares? (Source: Google Finance)

Finimizers can put this Insight into practice for free by checking out companies’ investor relations websites. These, along with national regulators’ online profiles for public firms, should detail all relevant filings related to insider transactions. Of course, there can be a lot to wade through – which is why some prefer to use platforms which collate that data for you. Either way, it can pay to keep your ear to the ground…

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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