A trading strategy that I use: Insider Trading Model

I use a few trading strategies at the same time to smooth out my portfolio’s returns. One such quantitative trading strategy is my Insider Trading Model.

What is the Insider Trading Model

As you may know, the stocks that corporate insiders (e.g. CEOs, CFOs) buy outperform the broad stock market. This is because no one understands their companies’ prospects better than corporate insiders, which enables insiders to profit from this information advantage. This is especially true during times of market turmoil when most traders react emotionally while insiders logically evaluate the facts.

This is what would happen if, every single month, you bought the S&P 500 stocks that corporate insiders bought last month:

Let’s call this the “Basic Insider Trading Strategy”. From May 2003 – present:

  1. Basic Insider Trading Strategy yields an average of 20.2% per year
  2. Buy and hold the S&P 500 (including dividends reinvested) yields an average of 10.1% per year

The Insider Trading Model is currently a work in progress. Instead of blindly copying the trades of corporate insiders every month, the model adds 1 trend following and 1 contrarian component to improve returns.

Insider Trading Model’s rules

  1. Every single month, buy the S&P 500 stocks that corporate insiders bought last month IF…
  2. the Basic Insider Trading Strategy’s 10 month average is going up OR the S&P 500 Insider Buy/Sell ratio was above 0.3 sometime in the past 6 months.
  3. Otherwise, do not buy stocks. Buy TLT instead (Treasury bond ETF).

In a nutshell, copy corporate insiders IF the trend is up, or if there is an overwhelming amount of insider buying (i.e. corporate insiders as a group are predicting a major stock market bottom).

Performance

As you can see, this simple strategy for following corporate insiders SIGNIFICANTLY outperforms buy and hold for the S&P 500. From 2003-present:

  1. Insider Trading Model yields an average of 24.5% per year
  2. Buy and hold the S&P 500 (including dividends reinvested) yields an average of 10.1% per year

Improvements I’m making to the Insider Trading Model

I’m improving the Insider Trading Model by narrowing down the selection of stocks to buy. Right now, the Insider Trading Model buys every stock that insiders bought last month, indiscriminately.

Going forward, the Insider Trading Model will be more selective about which stocks to buy. In doing so, the Insider Trading Model’s performance will increase even further. My algorithm will focus on several factors that are proven to work e.g.

  1. Focus on CEO & CFO trades, ignore trades by large 10% shareholders
  2. Focus on small cap stocks (non-S&P 500) instead of large cap stocks
  3. Focus on multiple insiders buying the same stock within a short period of time (aka “cluster buys”)
  4. Focus on non-planned trades
  5. Focus on trades that significantly increased the insider’s holding in the company
  6. Focus on stocks with lower valuations
  7. Focus on insiders that have many years of experience working in the industry

Where can I find the Insider Trading Model’s latest trades?

The latest insider transactions can be found here. I will soon publish a webpage that hightlights the Insider Trading Model’s latest trades.

In the meantime, email me at contact@bullmarkets.co if you have any questions, and sign up to my email list to be notified of improvements to the Insider Trading Model.

8 comments add yours

  1. Hey Troy, thank you for all the great content. Does this model also mimic the selling of insiders or is it purely a buy and hold strategy?

    • Right now this model only considers insider buys. It is not a buy and hold strategy (i.e. sometime you may not buy stocks at all). Thusfar, it does not consider insider selling.

      Going forward, I’ll be working on another long/short strategy that takes into consideration insider selling. I.e. buy the stocks that insiders are buying, sell the stocks that insiders are selling

  2. A model to take advantage of insider buying (a good thing) at a time when insiders are selling stocks like they are going out of style (a scary thing). It’s perfect timing to get ready for the switch to insider buying, but the buying may be indicated only after the markets plunge, as the insider action now suggests. Presumably insiders sell too early!

  3. Hi Troy, glad you’re back here! Just want to mention that I’ve been studying your previous posts on insider trading and have been digging into data, both yours and by others. I’m looking forward to learning about the details of the Insider Trading Model. One issue I’ve struggled with is an exit plan. As you’ve stated, insider selling isn’t necessarily a good indicator and trend following often leads to early exits with individual stocks. Waiting for a signal from the broader market goes against the theme of investing in individual stocks. I’m sure you have a couple of ideas. Thanks!

    • “I’m sure you have a couple of ideas. ” I’m working on that myself.

      One thing I find particularly interesting: insider selling on average isn’t a good indicator. However, it’s necessary to filter through insider sales and separate the signal from the noise. E.g. ignore all pre-planned sales, of which there are a lot.

      Perhaps this will give a more accurate sell signal.

      I’m working on this right now – a lot of data to sift through!

  4. I’d love to know more about your trading and investing models.

    I’d like also to know which is their max drawdown, win rate and other statitics regarding your best portfolio models.

    Bye.

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