“The Weismann Secret — $24 Million in Profits”

By Travis Johnson, Stock Gumshoe, January 31, 2008

This teaser email comes in from the folks at the Oxford Club, who are selling what sounds like a new service from Alexander Green called the Insider Alert. It normally sells for $2,900, they tell us, but is currently available for $1,011.

This service tracks insider buying, as do so many others, and tries to tell you which stocks you should buy based on the buying and selling behavior of corporate officers and other insiders.

The letter would have you believe that Fred Weissmann discovered this secret, whoever he is, and that it led him to riches. I have no idea whether or not that’s true, I haven’t ever read anything about the guy. That’s generally immaterial to the point here, though.

The basic concept is teased fairly heavily, with quotes from some investing luminaries — including Peter Lynch, who is quoted as saying that “there is no better tip-off to the probable success of a stock.”

And Mark Hulbert is quoted as follows: “Investors can safely ignore the consensus and rely on [the Weismann Secret] alone.”

While that’s an accurate quote, except for the “Weismann” bit”, it doesn’t tell you much.
Here, from the same NY Times column as they’re quoting from, is a more explanatory quote from Mark Hulbert quoting research that was based on the decade leading up to 2003: “this means that when insiders are bullish, the consensus of Wall Street’s analysts is largely irrelevant to how a stock performs over the next year. In such cases, investors can safely ignore that consensus and rely on the insiders’ behavior alone.”

And one of the leading scholars of insider trading is quoted as well, saying that “Insider buying activity signals greater-than-average stock price increase.” The teaser indicates that this was published by the University of Michigan, but it was actually in a book from MIT Press entitled Investment Intelligence from Insider Trading, by Hasan Nejat Seyhun. To be fair, Seyhun is (or was, haven’t checked lately) a University of Michigan faculty member.

So they’ve established that they’re essentially selling a service based on some well-known trends about insider buying and the impact that has on stock prices over time.

But they also put in a bit about the “de-classification of inside information,” referencing the SEC filings that are published monthly that share insider trading activity, and the actual form (Form 4) that is submitted to the SEC. Nowadays, of course, the Form 4 is available to the public as soon as it’s filed, through Edgar and, subsequently, through literally dozens (at least) of other websites and services that follow this data. It’s federal government information and thus public and non-copyrightable, so anyone who thinks they can add something can republish it however they like.

So what else are they selling us? It’s really a decisionmaking process — how to decide which insiders you should be following.

Most of the things that are part of this special analytical approach are actually just proven academic theories on insider trading.

The things that go into what he calls “Insider Profit Analytics” are

  1. Insider buying, not selling.
  2. Significant buying. (relatively large amounts of stock)
  3. Insider buyers who have successful track records.
  4. Insider buying clusters. (multiple purchases by insiders)
  5. Insider buying at the high end of the price range.

Certainly, I think we can agree that those all sound like sensible data points to focus on.

Here’s an older article I shared with my readers the last time I looked into an “insider buying” system (the USG-4 teaser from Stansberry & Associates) — essentially, it quotes Seyhun’s main points that the important things are clusters of buying, large amounts of buying, and the size of the company (smaller companies are more prone to do better with insider buying patterns).

The other key thing that this teaser says they’re selling is the ability to find insider buys that are really buys — not options or stock grants. This is also very clearly a part of every service of this type, and it clearly notes on the Form 4 whether it’s an open market buy or an options grant or something else.

There are no end of newsletter and trading services and software packages that purport to find the best insider trading patterns and help you to trade off of them. For the most part, in my admittedly limited experience with these, they all seem to follow the same well-accepted academic research. I would be somewhat surprised if any of them are much better than the others, but I don’t have access to any kind of verifiable track record for any of them.

So I’ll just tell you pretty much the same thing I said last time I addressed this topic: If you wish to put in the time, it’s fairly easy to follow insider buying patterns. One of my favorite free sites (for it’s simplicity and focus on just a few of the top companies each week) is www.insider-monitor.com, and a well-respected paid site that costs much less than most of the newsletters in this space is Form4Oracle.com, but there are so many that if you wanted to subscribe to a data service that does this kind of narrowing for you you should be able to try several and fine one that you personally prefer.

And one final point: Do keep in mind that insiders are often right, especially when they move in packs. But they’re also often wrong or too optimistic about their companies, and often very early — pretty much every mortgage finance companyhas had significant insider buying for the past year, more or less steadily. That may mean that insiders have conviction that the current crisis in their sector will eventually pass, but it sure hasn’t happened yet.

And insiders themselves are not unaware of all this research, or of the fact that their moves are closely followed — you will also sometimes see insider buying that appears quite orchestrated, perhaps as a way of trying to prop up the stock price (generally, it might sometimes be a red flag when there are many tiny transactions of a few thousand shares by executives who own millions of shares).

Insider selling, by the way, is often followed even more closely but means relatively little over time — the standard mantra is that insiders sell for lots of reasons (don’t get a paycheck otherwise, putting the kids through college, want to buy a house, etc), but they buy for only one (they think the stock is cheap). Maybe we could add a second reason, which is that they know we’re watching.

So … insider buying patterns are certainly a well-validated and accepted indicator of stocks that will beat the market over the long term — but it doesn’t work for every stock so diversification is important, and the data that you need access to is not controlled by any one newsletter or service. If you’ve got a favorite insider tracking tool that you use, or have enjoyed success or failure by following insider moves, feel free to share it here.

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...



This site uses Akismet to reduce spam. Learn how your comment data is processed.

Inline Feedbacks
View all comments
January 31, 2008 9:33 pm

This newsletter, The Insider Alert, has been around for at least a few years. I received it for six months, was underwhelmed, and canceled. Results over the six months were roughly in line with the market average.

Insider Alert is one of Agora/Oxford Club’s six “VIP Trading Services”, three of which are Alexander Green services. They claim that the list price for each one is in the $2500 ballpark, but somehow they are all available for around $1000. Green has a decent track record with the Oxford Club basic newsletter, around 20% annualized over the past five years or so according to Hulbert. The “VIP Services” like the Insider Alert are not worth the price in my opinion.

Add a Topic
Add a Topic
Add a Topic
February 1, 2008 12:32 am

A heads up on E-TRADE stock.Almost every company insider has taken large purchases and exercised options around $5.00. One analyst predicts upside to $8.00. Although I trade there, I wont take the recommendation probably with regret, because I dont like their balance sheet and I feel like I am betting on the come.

Add a Topic
Add a Topic
Gravity Switch
Gravity Switch
February 1, 2008 10:19 am

Thanks Chris, I hadn’t come across it before but it’s good to know they’ve been around a while — and that you found them to be average (as I imagine most of these services probably are in practice). And Imburg, that has really been the pattern for soooo many financial companies over the past six months — incredible levels of insider buying as if they just can’t believe that the situation is as bad as it appears. I guess we’ll find out if they were right to buy in a year or so.

👍 7
Peter Mac Isaac
Peter Mac Isaac
February 1, 2008 8:35 pm

Well teased