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Comment by nostrademons | Hacker News Reader

Insider selling itself isn't a warning sign that the company is overvalued. Many directors and execs get a large portion of their compensation as stock grants, and they have to sell to fund their lifestyles. Heck, many tech CEOs take $1 salaries - you don't actually think they live on $1/year, right?

Insider buying is almost always a sign that the company is undervalued in the market. People inside the company are usually overweight on their employer's stock, because they receive it as compensation and usually will get enough of it that it's by far their biggest holding. If they want more of it, despite the risks to diversification that this entails, they must have a pretty good reason to believe that the company is doing better than the Street thinks it is.

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Insider buying is almost always a sign that the company is undervalued in the market.

Do you have data to back this up? I ask because the standard wisdom was that stock buybacks were a sign that the stock was undervalued. But it turns out, looking at historical data, that it was no better predictor of the stock price in the future than random chance.

You're probably talking about COMPANIES buying back their stock, not directors or founders.

Of course companies act for the well being of the company itself, while directors only for theirs, so yeah, insider buying by a company or a director is totally different.

I get that their different, but does the data back up insider buying translates to undervalued stock? I used stock buybacks as an example where people used similar logic to justify a stock being undervalued, but the data didn't bear it out.

My question is does the data bear it out (presumably the data exists) or is it just an assumption based on the idea that insiders _should_ have a pretty good idea of the value of the company.

Some data here:

http://books.google.com/books?id=iYuh-gfnwb0C&pg=PA361&#...

Basically, it seems that extreme insider buying is a very good sign for the market as a whole, but it's fairly rare. (31.7% returns in one three month period w/ insider buying signal, vs. avg. 4.2% returns in 75 3-month periods w/ insider selling signal)

In terms of individual stocks, it seems that the predictive power of insider buying as a metric is best when mixed with taking into account the company's dividend yield, and they claim that this gives you a 6.2% edge.

That's good to know. I should set something up so that when I do detect insider buying, I go hugely in on the S&P500.

For individual stocks the difference is too small for me to feel comfortable.

Said another way.

Where there is an active market for private company shares open only to a limited group (employees, investors and other existing shareholders), potential sellers (employees & investors) have had reasonable opportunity to sell however much they want. Potential buyers, on the other hand, do not necessarily have the opportunity to buy. So if you are relating to the value a company would have a following an IPO, you would expect the value to rise. There aren't many new sellers at the internal market valuation price or lower (they could have sold before at that price).

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