Strategy Section--Trace the Insider Buying Stocks(1)

1) Introduction

Before start to discuss about this, I would like to clarify that even I just explore this strategy which first knew from the book " Finding the next starbucks " and further proposed by bobobobo. The inputs from all of you are necessary and appreciated so that we can build a reasonable sound model for consistent performance. Can we do that? I think we can.

Trade based on insider buying has been existing for quite a while and has been used by peter lynch quite a lot ( described in his book << One up on the street >> ). The method won't be obsolete even it has been used widely for its fundamental reasons which can be summarized as below:

1)Insider behavior matters because research based on real-time signals has shown that a properly modeled picture of insider actions can provide the most accurate reflection of the prospects for the company, industry, economic sector, or even the stock market in general, going forward.

2) This makes perfect sense from an intuitive perspective. Corporate insiders possess all the necessary skills and characteristics that one could use to describe the "successful" investor. These include: A deep knowledge and understanding of the company and/or industry; A demonstrated ability to produce success; The training necessary to understand risk and to control it; The wherewithal (capital) to take advantage of opportunity when it presents itself and finally; A tendency to go against the crowd.

3) Further, insider buys are especially useful. Since insiders have exclusive information on the company performance, if they are risking their own money on the stock, usually they should have good reasons, especially when several insiders buy the stock at the same time.

Pls pay attention here, we only care about insider buying not selling with an assumption of a long position in the stock not a short one. The insider selling have different explanation sometimes that we will further elaborate in the future. But as an initiative, we wanna focus on a long position first, not to be distracted.

In order to fully explore the benefits of such strategy, we propose to investigate from several perspectives highly related to potential gain in a middle term, i.e. 6 months, with an expected return on investment about 30%. You may argue it could be a little bit high, but through our further research, the portfolio build from such strategy could yield at least more than the general market yield. The perspectives will be divided into 3 sections which are 1) Building the universe of active insider buying stocks, a methodology to find those companies that have intensive insider buying in the past 3 months or 6 months for different time frame. 2) Reducing the trading candidate, a process that we use fundamental research to filter out those candidates that having high probability to succeed. 3) Entry and Exist Analysis, a strategy that describes how we are going to trade into those stocks after step two. Step 3 is quite important for implementation. We could find if we invest at a wrong time, loss could be huge even the company is pretty good. For example, if we pay $1000 for GOOG now, would it be a good one?

Those three steps are complementary to each other which can't be separated to ensure that our goal can be achieved. Each step in the strategy needs to be investigate the potential pros and cons so that drawbacks in each step could be minimized.

NOTE: if you have any ideas and thinking in each step, pls email me at totalmerrill@hotmail.com or leave your msg here. Any ideas would receive fully attention during such strategy building process. You know a strategy can't be improved without different sources.

by the way, all of the articles related to this strategy would be published at Investshuttle.com, the site that I built to upload our pdf files. The introduction page can be downloaded now.