I guess Stansberry’s folks must just be putting together the most entertaining teaser emails, because that’s a lot of what I’ve been covering lately. And today is no exception.
This teaser came in yesterday from Porter Stansberry, for the S&A Inside Strategist, which is a new service that will cost you $500 a year.
What is it teasing?
“A one-page form published every week by a Federal office in Washington, D.C. is making a small group of investors rich.”
Well, that sounds pretty good — but what on earth could he be talking about?
“The official paperwork is done at a small building at 100 F Street in Washington, D.C., 3 miles from the White House.“
But, you don’t have to visit Washington for these official tip sheets, thanks to Porter and his pals, you can get them delivered to the comfort of your own home.
He makes it clear that these are official documents from the SEC, which of course publishes all the filings of public companies through Edgar and lots of other free services. Clearly, we’re not talking about a standard 10-K here, though, since that’s not going to make anyone rich overnight … at least, not without a lot of thinking and luck.
And according to all the examples Stansberry gives, with lots of nice looking charts where the “USG-4 tipsheet” was filed right at the bottom of a trough and the stock shot to the moon following that, it’s pretty clear that the “USG-4 Tipsheet” is actually …
As far as can tell, just the plain ‘ol SEC form 4.
100 F street is, in addition to being a few miles from the White House (and about ten miles from my house), the headquarters of the SEC.
And Form 4 is the document that insiders need to file when they trade in their own company’s stock, so you’ve probably seen it all the time. It looks exactly like the little snippet of one that Stansberry shows in the ad, and the data is pretty well distributed — if you look at the insider transactions in Yahoo Finance, that’s just the Form 4 info.
Companies are required, according to my understanding, to file “management transactions” by the third day of the business week following the transaction — so, by Wednesday every week companies file their transactions. They can file earlier, but most do not. And keep in mind, this is just based on my scanty understanding of SEC rules from a while back — I think some filings are now required to be made within two days of the transaction now, but haven’t actually checked to see what the specific rules are.
I don’t know anyone who would consider the Form 4 to be a secret tip, but I do know that plenty of academics have shown that insider buying does indeed lead to improved stock performance over time. I expect the examples Stansberry provides for this service are the most exaggerated ones available, but it’s true, as you might expect, that insider buying is generally “good.”
Stansberry cites a few academics who have verified the success of the “USG-4 Tipsheet”, including probably the preeminent scholar of insider trading, H. Nejat Seyhun at the University of Michigan. Here’s an older article about his studies, he continues to work on this but the key criteria to consider are noted in this article and haven’t changed much. Basically, the best indicator for making money using this strategy is a large number of insider open market purchases at a small cap company. Options stuff generally doesn’t help, nor do non-open market transactions, and the impact at a large company is, as you would guess, usually much less significant than at a small one. So I expect that kind of information is what Stansberry is talking about when he says this service will help you understand which filings are important to move on.
So … how do you find those? That is indeed the tricky part. SEC filings are public and free, so some folks have created databases based on them that help with form 4 filings or finding other specific kinds of filings. Form4Oracle.com is one that charges you money for access to their proprietary spins on the data, And Vickers Stock Research gives free access to some great data on insider trading for at least a limited time. Other simple (and free) ones like Search-SEC.com or Insider-Monitor.com provide just some basic listings, like the companies with the largest number of insider transactions in a given week. Reallly, the list of companies that provide this kind of service is almost too large to enumerate — one even, as Stansberry teases, releases it’s weekly update on Wednesdays (Insiderscore.com)
You can always do the searching yourself, too, just go in to the SEC Edgar database on any day of the week (a Wednesday if you want to stick with Stansberry’s plan, though I don’t know if that matters at all) and search for “recent filings” and restrict the view to form 4. You’ll get something that looks like this, and since so many companies file all the time it will be different every time you check.
Graham Summers is the editor of this particular newsletter, and he does indeed have some experience analyzing and publishing about insider buying trends. I don’t know if he will do better than you could by just watching the data, but it seems to me that the strongest thing you can provide in this area of investing is good, searchable data. You can get that from lots of sources, and I’d imagine many of them are less expensive than this S&A service.
If I were personally going to follow this as a significant investing strategy, I might subscribe to a data service like Form4Oracle before subscribing to a real newsletter — especially if that newsletter didn’t have a very long track record, since if you want to do your own searching and computing the data services are much cheaper … but that’s just me, and I generally like to put in my own time instead of money if that’s an option. It may be that there really is an SEC weekly digest of some sort that details these things every week, I’m not sure. There is a daily SEC digest, but it generally only includes things that rise to the level of being reported on an 8-K or an S-something or other, neither of which includes routine Form 4s.
If other folks have experience following insider buys as an investment technique, please share here or in the forum — following insiders is certainly a proven technique in the academic sense, though I don’t know that a newsletter subscription is the only effective way to implement it in your portfolio.
Personal Capital is an advertiser with Stock Gumshoe, but Travis also uses it every day for his personal accounts and finds it invaluable. Here's what he said: "They offer a great (and genuinely FREE) 'second opinion' for your financial plan, but what I love most is their automated financial dashboard -- it will look at all your assets and debts, tally up your asset allocation, project where you'll be at retirement, and suggest ways to manage risk or improve returns. It's free, I think their free tools are great, and I think it's worth checking out -- you can do so here.