I think you're pointing to an important lesson: Investing is messy because trying to predict the future is a soup consisting of a ton of ingredients. In a delicious soup it's hard to say exactly what ingredient is the root cause for the deliciousness.
But I think you're taking it a bit to far to say the many pieces leading to higher value is not the cause of the higher value.
In a delicious soup, it would not be wrong to say that the chicken broth is the cause of the great taste, but so was the carrot, the thyme and also the water.
What I'm trying to point at is that (as you rightly point to) there's a bunch of stuff that is the cause of higher future value. And I think that done right, inside ownership is one of those contributing to a higher future value. But it is not a guarantee against mismanagement (nobody wants to fail at their job).
I am not surprised by the finding that insider activity is not a good indicator of subsequent shareholder returns.
Remember that insiders have a very narrow field of vision. They know about their company and their industry, but they have no peripheral vision in relation to anything else. They live and breath their business - its all they know.
Investors like you and me are very different. They analyze different companies, in various industries and across diverse geographies. They have a wide field of vision and far better perspective. So when an investor decides to buy or sell shares in a company, it is generally a determination based on opportunity cost and the ability to move money freely from one business to another.
In contrast, when an insider decides to buy or sell, it is rarely based on opportunity cost. Sales are often influenced by the need to settle tax liabilities or personal expenditures (perhaps sending the kids to University) and often have nothing to do with the future prospects of the company. Buys are often influenced by recent price action because very few corporate executives understand how to properly value a company or its shares. Instead they think to themselves, "the share price is 20% lower than where it was earlier this year, I can buy now and catch the bounce".
The only time that insider influenced buying is a good indicator is when you have a savvy CEO who understands markets, only repurchases shares when below intrinsic value, and goes on a buying spree. Berkshire Hathaway is the best example.
Most stock buy-backs occur well above intrinsic value, regardless of the share price, simply to offset dilution from SBC. In these circumstances, they are not a good indicator for external investors.
Marvelous piece! I usually see insider ownership as 'nice to have'. In my case, whether that ratio is 30% or 7% it doesn't shift much... but I do like to see it above 0-1%. It would be interesting to plot a similar performance chart within Russell, with 2 groups: below 0.50% I.O. vs above 5% I.O. (threshold to be defined). Anyhow, love the analogies and all the accurate reflections 👏🏻
What about the results of founder led businesses with a high ownership? Usually these types of businesses are a lifes work/passion. I would give these businesses a higher rating than simply a high ownership or even a family led business as it could be two generations on from the true founder.
I think you're pointing to an important lesson: Investing is messy because trying to predict the future is a soup consisting of a ton of ingredients. In a delicious soup it's hard to say exactly what ingredient is the root cause for the deliciousness.
But I think you're taking it a bit to far to say the many pieces leading to higher value is not the cause of the higher value.
In a delicious soup, it would not be wrong to say that the chicken broth is the cause of the great taste, but so was the carrot, the thyme and also the water.
What I'm trying to point at is that (as you rightly point to) there's a bunch of stuff that is the cause of higher future value. And I think that done right, inside ownership is one of those contributing to a higher future value. But it is not a guarantee against mismanagement (nobody wants to fail at their job).
Thank you for a thought-provoking piece 🙌
Great piece.
I am not surprised by the finding that insider activity is not a good indicator of subsequent shareholder returns.
Remember that insiders have a very narrow field of vision. They know about their company and their industry, but they have no peripheral vision in relation to anything else. They live and breath their business - its all they know.
Investors like you and me are very different. They analyze different companies, in various industries and across diverse geographies. They have a wide field of vision and far better perspective. So when an investor decides to buy or sell shares in a company, it is generally a determination based on opportunity cost and the ability to move money freely from one business to another.
In contrast, when an insider decides to buy or sell, it is rarely based on opportunity cost. Sales are often influenced by the need to settle tax liabilities or personal expenditures (perhaps sending the kids to University) and often have nothing to do with the future prospects of the company. Buys are often influenced by recent price action because very few corporate executives understand how to properly value a company or its shares. Instead they think to themselves, "the share price is 20% lower than where it was earlier this year, I can buy now and catch the bounce".
The only time that insider influenced buying is a good indicator is when you have a savvy CEO who understands markets, only repurchases shares when below intrinsic value, and goes on a buying spree. Berkshire Hathaway is the best example.
Most stock buy-backs occur well above intrinsic value, regardless of the share price, simply to offset dilution from SBC. In these circumstances, they are not a good indicator for external investors.
Marvelous piece! I usually see insider ownership as 'nice to have'. In my case, whether that ratio is 30% or 7% it doesn't shift much... but I do like to see it above 0-1%. It would be interesting to plot a similar performance chart within Russell, with 2 groups: below 0.50% I.O. vs above 5% I.O. (threshold to be defined). Anyhow, love the analogies and all the accurate reflections 👏🏻
Insider ownership needs to be done right. Listen to this podcast if you want to understand what I mean https://rockandturner.substack.com/p/podcast-serious-bleed-on-capital
What about the results of founder led businesses with a high ownership? Usually these types of businesses are a lifes work/passion. I would give these businesses a higher rating than simply a high ownership or even a family led business as it could be two generations on from the true founder.