In a continuation of our discussion around the Tweedy Browne publication What Has Worked In Investing we’re going to address the approach related to investing with the “inner circle” and buying stocks where insiders are buying as well.
Results of several different studies were included, one of which was conducted in 1976 by Validea “Conservative Growth Investor” Martin Zweig. This guru believed that those who work for a company know it best and if several are buying shares (and nobody is selling) it could bode well. In order for a stock to pass our Zweig-based screening model, there must be three or more insider buying transactions during a 3-month period in which no insiders sell their shares.
Our Peter Lynch-based screen also incorporates an insider buying criterion. Lynch believes there is only one reason insiders buy: They think the stock is undervalued and will eventually go up. Conversely (and contrary to the Zweig philosophy), Lynch considers insider selling to be fairly meaningless since it could be motivated by myriad life factors (including college tuition, vacations, other discretionary spending, etc.).
The following chart outlines results of the five studies reported in the Tweedy publication:
Note: The publication also presents results of studies conducted in the U.K. and Canada (using slightly different assumptions and criteria). While excess returns were also found with respect to insider stock purchases, the outperformance was less dramatic.