Forums > Stock Picks > Investment Intelligence From Insider Trading Book - Dr. H. Nejat Seyhun

10/28/2010 3:42:45 PM
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Investment Intelligence From Insider Trading Book - Dr. H. Nejat Seyhun

According to two decades worth of research from Dr. H. Nejat Seyhun compiled in his book Investment Intelligence from Insider Trading, buying is most predictive when it (1) comes from the CEO or other top-level executive, and (2) it's performed in bulk. Seyhun found buys of between 10,000 and 100,000 shares to be most informative.

Dr. H. Nejat Seyhun wrote Investment Intelligence from Insider Trading in which he reported the result of a study covering 21 years of insider trading. In the August 2004 issue of Motley Fool Hidden Gems, Tom Gardner interviewed Dr. Seyhun.

Among other results, Dr. Seyhun noted the following:

  • Top level executive trading is most information laden. In general, it runs CEO > officer > board member.
  • Insider buying is much more predictive than insider selling. Option exercising adds a lot of noise. Buying is more bullish than selling is bearish.
  • The direction of recent price movement and the action, together, are more informative than the action alone. Buying into a rising price (bullish) or selling into a declining price (bearish) is much more informative than the opposite (buying into a decline, selling into a rise). In particular, selling into a rising price is more likely to be the closing of an earlier position instead of a bearish signal.
  • Number of shares is important. As the number increases to 10,000 or to 100,000 or so, it is informative. Above 100,000 or so and below a few thousand, it is not nearly as informative. This ties into who is doing the trading.
  • Insiders tend to invest rather than trade. They buy and sell based on their three- to five-year assessment of the business and industry, not on how next quarter or next year will turn out.

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