Trading stocks is hard. Really hard.
Professionals, who have 30 of the smartest people you have ever met working for them, and limitless resources fail to beat the benchmark 70% of the time.
As for amateurs, the likelihood that they beat the benchmark for 5 consecutive years is 0.03% and for 10 years it’s 0.00001024%.
So basically, I’m shooting to be a 1 in 10 million.
So why am I trying?
Cause I’m stupid, ignorant, over-confident and think it’s a good challenge.
Without further ado, here’s my idea.
Why does anyone buy a stock?
Because they think it’s going to go up.
Why does a CEO, CFO, director, or any “insider” buy stock in their own company?
Also, because they think it’s going to go up. Duh.
Only difference is they have the best view of the company’s actual performance and health. Thus, putting their own money in signals that they expect strong future performance.
This can be inferred from inverting the problem. If you worked inside a company and thought the business was about to tank, would you buy stock? No probably not.
So, if you buy it signals you believe the company has strong future prospects.
To be clear, “insiders” aren’t allowed to trade on material, non-public information. This is insider trading and is illegal.
So, what are they trading on? Judgment. Insiders can’t act on a specific secret, but they can act on thousands of small observations that no outsider sees, and on a gut sense of whether the market has the price wrong. That legal edge is what I’m trying to piggyback on.
So I’ve put together a set of criteria to score groups of “insiders” purchases across multiple axes including: corroboration of multiple perspectives in the company, timing of entries, information opaqueness of the firm, individual insider conviction judged on the size and rarity of the purchase. Clusters of “insider” purchases are then scored, and trades are placed on the best ones.
Do you think it will work?
If you said yes, you should also believe in the following events: getting struck by lightning on a Monday in the next year or guessing 23 coin flips correctly in a row or going to a casino with 1 dollar, only playing roulette and walking out with ten million dollars (as these are roughly 1 in 10 million chances).
But regardless of chances of success, it’s a fun little thinking game.
Over time I’ll update my performance here.
Feel free to reach out with questions, comments or thoughts.
This is not financial advice. (obviously)
ChattyG scared me into putting this in.