Can you get rich by insider trading — legally?
Slate brings the info. First, how to identify which executives might be insider trading:
To assess the returns from insider trading, the authors collect SEC documents listing the trades of all insiders—senior executives, board members, shareholders with greater than 10 percent ownership of the company—between 1986 and 2007. They classify traders as “routine” if their purchases or sales fall on the same calendar month for at least three consecutive years in the past. They classify traders as “opportunistic” if their trades are not consistent or predictable in this way. (The authors also consider the possibility that insiders are sometimes routine and sometimes opportunistic, but adding this additional complication to their analyses doesn’t change things much.)
The authors then measure the trading profits of opportunistic and routine traders after controlling for factors like a stock’s riskiness and general market conditions at the time the trades take place. Routine traders don’t do any better than the average Joe depositing his monthly savings in a Vanguard indexed mutual fund. In fact, they do a little bit worse. The opportunistic ones beat Vanguard (i.e., the market average) by about 0.8 percent per month, which adds up to about 10 percent per year.
So should you be dialing your broker with instructions to mimic the trades of insiders that the study identifies as opportunistic? Insiders are required to report trades to the SEC within a couple of days of a transaction, so if you were closely following SEC filings you’d get almost the same boost to your portfolio as insiders. (Even if it took a little longer to get the information, you’d still make out pretty well—Cohen and his co-authors find that the superior performance of stocks purchased by insiders continues for months afterward.)