Let the Insiders Hand You an “Unfair Advantage”

by Insider Alert Research Team

 Everyone in the stock market is looking for the ‘magic signal.’ That single factor that indicates an unequivocal BUY with guaranteed profits ahead.

The honest truth is there is no magic signal. You won’t find one by drawing lines on a chart. You won’t find one with a mathematical formula. And you certainly won’t find one by using the ratings of the big brokerage houses.

The financial markets are probably the most-competitive field of endeavor on the planet. There is a lot of brainpower and financial muscle trying to “win.”

You need to look at the market differently to beat it.

One of the best predictors of wealth creation is ownership by the people in charge. Hardly anyone focuses on ownership.

It’s a simple thing, yet nearly all the financial world’s eyes focus on everything but this. By following the signals of the ‘people in the know,’ you dramatically increase your chances of making a profit.

That’s why we follow insider buying.

The Inside Track

The fact of the matter is there are always people who know more about a company than you can glean from months of reading financial statements and industry reports. People with more knowledge than the most highly paid and qualified professional analysts. Individuals who are privy to a treasure trove of information that is not even available to the public.

So, who are these guys?

As you may have already guessed, these “enlightened ones” are the corporate officers and board members that head up every single company. And if you like, you can make the exact same moves that they do.

Admittedly, there are all kinds of investment strategies. People put their faith and funds into strategies like “Dogs of the Dow,” seasonal investing, index investing, or simply, buy and hold.

But we have found that insider buying (when properly interpreted) is the most powerful predictor of investment success.

Research shows that sound companies with widespread insider buying tend to outperform the market by a substantial margin. In fact, a comprehensive study at the University of Michigan revealed that stocks with insider buying generally triple the performance of the market over the next six months.

Follow The Leader

Some of the most successful investors of our era attribute part of their success to following this signal.

Legendary fund manager Peter Lynch believes there is no better tipoff to the probable success of a stock. George Soros, one of the most successful hedge fund managers ever, has used the strategy to help earn returns of 36% annually… (at that rate, money doubles every two years).

Warren Buffett, too, is a big believer in what he calls “the biblical standard” (quoting Matthew 6:21: “For where your treasure is, there will your heart be also”).

Buffett’s own Berkshire Hathaway is stacked with insiders who own significant amounts of stock. (At one point, several years ago, Buffett wrote in his annual shareholder letter that every director of Berkshire Hathaway was a member of a family owning at least $4 million in stock. None of them acquired shares with options or grants). By the way… Berkshire Hathaway shares have delivered a compound annual growth rate of 15% since 1990.

And our own Alexander Green, the Investment Director of The Oxford Club, has used this technique with great success in his Insider Alert.

You can do the same in the stock market by limiting yourself only to companies that exhibit one of the chief characteristics of wealth creation: significant ownership by the people in charge.

Following insider buying is one of the investment world’s crown jewels – certainly the purest and simplest way to make money in the stock market. When insiders are piling their money into their own companies it’s because they believe the company is poised for a huge gain in profits.

And usually… they’re dead on.

Is it a Good Time to Invest in Stocks?

Is it a Good Time to Invest in Stocks?
by Alexander Green, Investment U Chief Investment Strategist
Monday, February 20, 2012: Issue #1712

More than two thousand years ago, the Greek sage and philosopher Epictetus counseled, “It is impossible for anyone to begin to learn what he thinks he already knows.”

Nowhere is this truer than in the stock market. You need only ask the many thousands of investors who have sat out an historic rally – the market has doubled from its lows years ago – because they just knew stock prices were only going to go lower.

That mindset has proved to be an expensive one. Yet these individuals now face another test.

If they jump into stocks today, having already missed one enormous move, they risk being in for the next leg down. That would hurt. On the other hand, if they continue to sit on the sidelines – earning next to nothing in bonds or cash – the market may well power higher and leave them with an even more extreme choice in the weeks and months ahead.

What is the prudent investor to do?

They Rise and They Fall

The first is to understand the error of your ways. Every market timer believes that if he sits patiently on the sidelines, he will get a better opportunity to buy stocks at lower prices.

And they often do. Unfortunately, they generally get to feeling so good about missing the downdraft that they convince themselves that the market will keep falling.

And, again, if often does. Until, of course, it doesn’t.

As the market climbs, they begin to rationalize that this is just “a bear market rally” or “a dead-cat bounce.” Until it becomes obvious that the train left the station and they’re still standing on the platform.

Cash is Not King, but Stocks Might Be

Warren Buffett’s mentor Benjamin Graham once said that no investor should have more than 75% of his money in stocks or less than 25%.

That’s a good rule of thumb. Seventy-five percent keeps you from getting overly enthused when times are good. And twenty-five percent keeps you from throwing in the towel when times are bad.

But what do you do now if you’re one of those who has played it too cautious until now and are fed up with your negative real returns in Treasury bonds or cash?

First, stop justifying what you’ve done and get off the dime. Start committing money to high-quality stocks in a gradual way. After all, if you shift a big percentage of your portfolio into stocks right now, you could regret it. And if you remain in cash, you could regret that, too.

So hedge yourself. Start moving money into stocks at regular intervals, being sure to keep buying if the market dips so you get better entry prices.

An Easy Way to Start Investing

A conservative place to start would be the Vanguard High Dividend Yield ETF (NYSE: VYM). True, it currently yields just 2.9%, but that’s still 50% more than 10-year Treasuries are paying and 50 times as much as the average money market fund.

Even if stocks go nowhere over the next 10 years – highly unlikely given the decade we just had – you’d still be better off in this fund than in a bond or money market fund.

There are a ton of reasons to put off making this move from the state of the economy to the size of the deficit. But that’s just the kind of thinking that got you stuck on the sidelines.

Look at the bright side. Inflation and interest rates are low. We’ve had five straight months of declines in the jobless rate. The ECB has extended three-year, low-cost loans to European banks. The Greek parliament has voted to actually cut spending. And we’re in a period of all-time record corporate profits.

So cast off. As the great nineteenth-century theologian William Shedd pointed out, “A ship in harbor is safe, but that is not what ships are built for.”

Good Investing,

Alexander Green

Warren Buffett Just Said “Buy!”

Warren Buffett Just Said “Buy!”

by Alexander Green, Investment U Chief Investment Strategist
Monday, November 21, 2011: Issue #1647

If you needed heart surgery, you’d try to find the most talented heart surgeon around.

If you were about to be subjected to a full audit by the IRS, you’d hire the most capable tax advisor you could find.

And if you needed investment advice? I hope you’re not one of them, but I know some folks who would read financial blogs by complete unknowns, take hot tips from friends and colleagues, or listen to a sales pitch from someone selling insurance or other financial products.

Big mistake. It makes a lot more sense to listen to the world’s smartest investors, instead. And one of the very best – if not the best – is Berkshire Hathaway Chairman Warren Buffett. (Ten thousand dollars invested in Berkshire Hathaway when Buffett took the helm in 1965 is worth well over $65 million today.)

And thanks to disclosures last week, we now know what Buffett has been doing during the last few months of crazy market activity. He’s been buying.

Specifically, Buffett has plowed $10.7 billion into IBM. He has increased his stake in Wells Fargo from 361.4 million shares to 352.3 million shares. He has boosted his Dollar General stake to 4.5 million shares from 1.5 million. And he has increased his holdings in insurer Torchmark to 4.2 million shares from 2.8 million.

There are a few interesting things to note here. The first is that while most investors have been either running to cash or nervously sitting on their hands lately, Buffett has been actively capitalizing on fresh opportunities. You should be doing the same.

Second, it’s worth mentioning that Buffett has generally avoided technology stocks like IBM. But upon reading not some super-secret briefing but rather the firm’s annual report, he learned that IBM enjoys an entrenched position providing technology services to major businesses.

Buffett likes companies with a “moat” like this and has famously said that his favorite holding period is “forever.” Indeed, he recently told The Washington Post that “IBM fits all my principles … it’s something we’d like to own indefinitely.”

Then there’s the price he paid for IBM. I often get emails from readers who are baffled that I sometimes recommend companies trading at or near their highs. Buffett bought IBM as it hit new highs – even as the broad market was cratering. Indeed, the stock has more than doubled since the depth of the 2008 recession.

Buffett’s response? He says the fact that IBM has doubled doesn’t bother him. Indeed, over the years he could have bought the firm at a tiny fraction of its current price. “What matters is what the company does in the future,” says Buffett.

There are a number of important lessons here:

1. As Buffett often points out, you should be greedy when other investors are fearful.

2. You shouldn’t be reluctant to modify your investment approach a bit (as Buffett has with one of his first significant forays into technology).

3. You shouldn’t fret about how much cheaper a stock was in the past if the business is sound and growing today.

And when it comes to investment advice, history shows it pays to listen to the best of the best. That’s one reason we’ve owned Berkshire Hathaway in our Oxford All-Star Portfolio for well over a decade.

Good investing,

Alexander Green