There is an investment strategy that I have always liked that involves following what is known as “the smart money”. This might sound like it is the opposite of what I am normally rambling on about, since my main approach to markets is to go against the herd. The big difference here is that the smart money is not the herd, and is in fact very often going against the herd.
The smart money is basically the big players in the markets, or the insiders of a company. Obviously insider trading is illegal and unethical, but that is not what this strategy is about. Executives of a company are in fact allowed to trade in the stock of their own firm, but it cannot be based on material non-public information. They must file all of their activities regarding their trading activities with the SEC and you can then go online and access this information. Big institutions also file their activities with the SEC, and between these two sources you can get a very good idea of what the smart money is doing.
Obviously if the insiders are buying like crazy, it means they feel very confident about the future prospects enough to put their own money at stake. Since they will have far greater insight into the business than any analyst, this is a snapshot of what the most informed investors in a company really believe, regardless of what they are bound by fiduciary duty to shareholders to say in the press. A CEO will never come out in the press and say, “We are doomed, the end is near, and I fear we will be bankrupt within a few years.” However, if the CEO really feels that way, it will surely show up in his SEC filings as he will be selling his company stock as aggressively as is legally possible.
Of course the reality is often far between either of the polar extremes, but if you monitor a company’s filings and all of a sudden insider selling spikes up, this is as good of a signal to sell as you will ever receive from the stock market. This also applies to the market as a whole as well, and the data is compiled and ratios are out there to gauge the overall confidence of the insiders of the market as a whole. Again, when overall insider selling gets high, this is a very strong sell signal.
There is no foolproof strategy or catch all indicator unfortunately, and there is a good chance something happens which even catches the brightest and best of the business world completely off guard. In this case insider transactions would likely be misleading, and also there is a lag between when they sell and when the data becomes made public. However, if you pay attention to what the smart money is doing in combination with the other elements of your overall strategy, you are more likely to be on the right side of the larger market moves.
David Mayes MBA provides wealth management services to expatriates throughout South East Asia, focusing on UK Pension Transfers. He can be reached at david.m@faramond.com. Faramond UK is regulated by the FCA and provides advice on pensions and taxation. Views expressed here are his own.
