Link: Thoughts from the Frontline.
John Mauldin reviews George Muzea's book The Vital Few or the Trivial Many," which is a study of how to invest with the insiders.
...when there is a divergence between insider selling and public opinion (thus the Vital Few vs. the Trivial Many) it is an indication of major and intermediate tops and bottoms. What we are still seeing today is a very bullish public and insider selling - not a good sign.
"In our opinion, whether or not the current decline escalates into something more sinister depends on the actions of insiders and stock mutual fund investors. The peak of redemptions and forced liquidations of stocks by equity fund managers always occurs at or near market bottoms. For example, the short- term bottom of September 2001 had net outflows of $29 billion. The actual bottom for most stocks occurred in July 2002, which had $53 billion in outflows. In both cases, insiders bought into these redemptions.
Current outflows are modest but whether or not they cascade into double-digit outflows depends largely on the mood of the public, heavily influenced by the actions of the market and the sentiment of market letter writers that influence them. Low risk entry points occur when insiders are bullish and investment sentiment is extremely bearish into a deeply oversold market fueled by forced equity fund liquidations,often accompanied by a negative news story.
So how does the little guy play the insider game? Muzea points out several ways. You look for companies that are making new lows.... If a company is down, but the insiders are buying, it is time to start your fundamental research to see if this looks like a turnaround. It is contrarian investing, and tough to do, but with a hint from the insiders that something is afoot it can be your most successful investing.
Before you buy any stock, you should perform that simple task. It is free and quick and may be worth more than all the research reports you read.
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