INVESTING WITH MILLIONAIRE INSIDERSTri Star Equity Research
TRI STAR EQUITY RESEARCH
AGENDA
• Insider Qualifications and Motivations • Rules for Insider Buying • Methodology and Sample Characteristics• Results
– Overall– Based on Market Cap– Based on Insider Type– Based on Transaction Size
• UMI Study• Limitations• Conclusion & Questions
TRI STAR EQUITY RESEARCH
Insider Qualifications and Motivations
• SEC: “in a position to have privileged non-public material information on a publicly listed firm.”- Officer (CEO, CFO, COO, Board Members)- Director (VP)- 10% shareholder
• Motivation: create shareholder value• SELL reasons vs. BUY reasons
TRI STAR EQUITY RESEARCH
Rules for Insider Buying
• Insider trades based on material non-public info fraud (violation of fiduciary duty to shareholders)
• Section 16(b) of the Security
Exchange Act of 1934 – Form 4 reported SEC within 2 business days – Illegal to Buy & Sell within 6 months– To sell insider must own security
TRI STAR EQUITY RESEARCH
Methodology
• Market: all stocks listed in USA (under SEC)
• Sample time frame: Oct 1 to Nov 30 2007
• Event: $1M + insider buy• Data source: Form 4 from j3sg.com
(3x day)
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Sample characteristics
10% Owners
47%
Officers 25%
Directors 28%
Small Cap 64%
Medium Cap 31%
Large Cap 5%• 204 transactions
• 4,4 transactions/day
Small 73%
Med 14%
Lrg 13%
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Risk Adjusted Returns
• Identifiy historical Betas
• R – β*Rm = α + ε
• Projected in 2 time frames:– 2 months after report– 4 months after report
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Results: Overall
2 months 4 months
HPR 0,7% 5,6%
Annualized 4,1% 17,8%
STDEV 22,3% 24,1%
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Results: Insider Type
Officer Director 10% SH
2 mo ER -2,8% 1,3% 2,2%
2 mo ER (an) -15,8% 8,2% 14,1%
2 mo STDV 20,8% 19,6% 24,6%
4 mo ER 4,1% 5,1% 7,9%
4 mo ER (an) 12,7% 16,2% 25,5%
4 mo STDV 30,3% 20,4% 24,1%
Outperform 2mo 39,1% 48,1% 41,6%
Outperform 4mo 52,2% 55,8% 53,9%
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Results: Market Cap
SML MED LRG
2 mo ER 1,96% -1,42% -2,85%
2 mo ER (an) 12,37% -8,24% -15,94%
2 mo STDV 26,37% 12,04% 15,52%
4 mo ER 5,80% 6,49% -2,85%
4 mo ER (an) 18,44% 20,76% -8,32%
4 mo STDV 26,63% 19,18% 15,52%
Outperf. 2mo 40,8% 46,6% 44,4%
Outperf. 4mo 53,3% 55,2% 44,4%
TRI STAR EQUITY RESEARCH
Results: Transaction Size SML MED LRG
2 mo ER 0,2% 2,8% 1,1%
2 mo ER (an) 1,1% 17,8% 6,8%
2 mo STDV 22,7% 24,2% 18,3%
4 mo ER 5,0% 12,6% 1,2%
4 mo ER (an) 15,7% 42,9% 3,7%
4 mo STDV 24,3% 27,4% 17,7%
Outperform 2mo 43,1% 40,7% 41,7%
Outperform 4mo 56,2% 55,6% 37,5%
TRI STAR EQUITY RESEARCH
UMI Study (2003)
• Nejat Seyhun, professor of Finance at the University of Michigan – Time frame: 1975 to 1995– Historic (vs actual)– Sample random transactions– All sizes of transactions
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UMI Study: Results
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UMI Study: Results
TRI STAR EQUITY RESEARCH
UMI Study: Results
TRI STAR EQUITY RESEARCH
UMI Study: Results
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Limitations
• Relative short time frame to complete research = 2 month population
• Performance time period (2&4 mo)• Particular market conditions (bear)• Some outstanding firms less than 60
months old
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Conclusion
• Sample outperforms the market
• 10% SH > Directors > Officers
• MED cap > SML cap > LRG cap
- However Russ2k > SML cap
• Transactions: MED > SML > LRG
• UMI study confirms overall results
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Questions