Don’t Trade Without Insider Information

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Disclaimer: Insider trading is illegal. Don’t do it.

A seasoned friend (he wouldn’t call himself an investor) once told me that unless you have some sort of insider information, the average investor is likely to be killed by the professionals because those professionals have friends in high places, right places, to give them some good informational nuggets to trade with. He worked on the efficient market hypothesis, that is the market value reflects all the information available, and I’m generally inclined to believe the same as well. Now, we take that information, put it together with what we may have learned reading Trading With The Enemy and it’s not difficult to believe that the professionals are all in bed together, playing by a different set of rules, and that some sort of shenanigans are going on. Oh yeah, add in the latest bit on Cramer and “fomenting” for a little bit of spice in that recipe.

Lately I’ve had my eye on one particular stock in a pretty sizzling industry, watching it fly high, fall, fly high some more but I’ve never bought any. In fact, I’m probably never going to buy any but that doesn’t stop me from peeking at it from time to time to see what’s going on. So, about a month ago it was at a high, let’s say in the high 20’s, but some mediocre news and the absence of news caused the stock to drift downward until it was in the low teens. Then, miraculously, it spiked up 15% two days in a row (Wednesday and Thursday) for absolutely no reason. At least no reason publicly. Then the following Monday, the company reported some excellent news and the stock took off (in part from short sellers looking to cover).

So, what did the buyers on Wednesday and Thursday know? Certainly they didn’t bid up the stock 15% two days in a row (32% gain in two days!) on the anticipation of good news, did they? Depending on the market cap of a stock, you might see maybe +5% the day or two before a potentially good earnings announcement (thought that’s not indicative of whether the announcement would be good or bad) but +15% two days in a row? People knew something (and other people didn’t).

Trading without insider information is like going bear hunting with a BB gun.

At the risk of not ending this article on a ridiculous image (who goes bear hunting anyway?), I am really curious to hear everyone else’s thoughts on this; whether you’ve seen something similar and agree or you think I’m full of crap and all conspiracy theory.

{ 8 comments, please add your thoughts now! }

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8 Responses to “Don’t Trade Without Insider Information”

  1. Living in an area with bears, I see nothing wrong with bear hunting! I probably wouldn’t use a BB Gun, though.

    As for whether something is going on, I always assume that there is inside information floating around. Having worked for a few years in the financial services industry, it would not be a stretch to imagine quite a few of my coworkers trying to get an inside edge on things. It’s a stressful job with high risk, high reward, and a quick trip to the curb for those that fail.

  2. KMC says:

    I think it’s self evident that there is blatant insider trading going on. How could you even doubt it? Are you telling me the company you’re talking about got 15% more valuable in one day for a valid reason like doubling their dividend or something similar? Apparently, no such information was released that day that caused the move. So what was it? Clearly enough people knew about the future information release that they acted on it.
    For example, analysts talk to management – it’s their job. I think this is a common conversation right around quarterly earnings time:
    Analyst: “So I think you guys will put up 5 cents per share.”
    CFO: “We feel a little more confident than that.”
    Analyst: “Maybe I should look at my models again. Maybe 6 cents.”
    CFO: [deafening silence]
    Analyst promptly walks to the proprietary trading desk and lets slip what a good quarter XYZ is anticipated to have.

  3. Tinyhands says:

    Whether there’s insider trading going on or not, the lesson to be learned is that unless YOU have that information, you probably shouldn’t be picking stocks. This conclusion leads many people, including myself, to become indexers.

  4. plonkee says:

    Maybe, its not so much insider information (in the illegal sense) as insider rumour. Like, there are rumours floating round that some people get to here, that may or may not be true, then if you are the gambling type, you might act based on those rumours – which may affect the share price and cause you to win or lose.

  5. Amanda says:

    I’ve always been hesitant in trading, i just plug money away in a sock draw :\

  6. mapgirl says:

    Having been on insider trading/blackout lists for past companies, I would say NEVER DO INSIDER TRADING. Ever. It’s a bad investment strategy because essentially, on top of it being illegal, you are also timing the market, which is not really a good idea for most investors. You’ll be trading with your heart more than your head. A sure way to lose money in the long run..

    Go straight for value investing. It’s the best way to make money. Buy a good stock and hold it. I’m leaning towards doing a little of that myself right now. I’m getting more familiar with the numbers I am looking for and will end up buying some stock here and there later this year.

  7. Adam says:

    You’re right on. There’s ample evidence of insider trading going on but it’s either so sophisticated or so “under the radar” that those people aren’t getting caught. But really I don’t get wrapped around the axl thinking about those kind of issues. If I do my homework and make well-informed trades (and I’m in it for the long-term gain, not a swing trade) then I’m going to be fine anyway. That’s how I see it.

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