The Boss Can Spot a Bargain

“Unless you're a member of Congress, insider trading is a risky way to try beating the market.

 

It sounds like the next best thing would be trading alongside insiders -- jumping in when senior executives or board members buy their companies' shares. But attempts over the years to profit from that have mostly fallen flat.

 

"It's sort of nothing -- no excess return," says John Spears, managing director at storied value-investing firm Tweedy, Browne.

 

Unless you apply the right framework, that is. Tweedy re-examined a 1990s academic study on what happens when you combine value measures only with significant insider purchases. Published as a book by H. Nejat Seyhun, "Investment Intelligence from Insider Trading," it showed stocks with big insider buys and the lowest fifth of price-to-book ratios beat the market by a whopping 11 percentage points over a year.

 

The asset manager updated and expanded Seyhun's observations and the results are even more compelling. First, it only counted large purchases -- those exceeding $100,000 -- and just those by C-suite executives. It also looked at other developed countries. Then it applied a more complex measure of intrinsic value. Over a little more than 26 years ending in September 2022, Tweedy flagged 12,604 insider buys.

 

Dividing the results into 10 slices by value, from cheapest to most expensive, and using a longer time horizon, it found the cumulative excess return peaks after about two years. The cheapest decile beat the market by 25 percentage points while the most expensive lagged behind by 6 percentage points.

 

It tried a further tweak: By only counting companies that had bought back their own shares at most three months before the insider buys, the excess return of the cheapest decile rose to an eye-watering 36 cumulative percentage points over two years.

 

Seyhun's study showed that, while following insiders doesn't always work, managers often know if their stock price is too low. When it looks cheap and they buy it in size then their timing can be excellent.

 

Tweedy is applying what it learned to its stock picks. It launched an exchange-traded fund with the ticker symbol COPY in December that explicitly follows the strategy. It is early days, but the ETF is beating the S&P 500 by nearly 13 percentage points so far.

 

One limitation is that many of the stocks are small and international. Another is that, even then, few stocks meet the criteria.

 

"You can't just turn on a switch every quarter and get 100 new names," sighs Bob Wyckoff, also a managing director.

 

But a few large U.S. companies tick at least some of the boxes. Coattailing some of JPMorgan boss Jamie Dimon's big buys has worked well. Another large company, UnitedHealth, saw major insider buying last month after the stock plunged, including $25 million from its returning CEO.

 

Senior executives don't have crystal balls, but they know a lot more than the rest of us.” [1]

 

1. The Boss Can Spot a Bargain. Jakab, Spencer.  Wall Street Journal, Eastern edition; New York, N.Y.. 18 June 2025: B11.