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Don’t Trade Without Insider Information

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 [3] 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” [4] 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.