Is Insider Buying Always Meaningful?

Peter Lynch famously said that “‘insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”

However, the truth isn’t quite so simple. On the ASX, I have often observed directors buying small amounts of shares in a speculative micro-cap, only for the company to subsequently make a few positive announcements and then raise capital. In this scenario, directors might be receiving fees of $50,000 to $70,000, so if their spending $10,000 – $20,000 on shares (prior to a capital raising) helps the company raise capital cheaper, and stay in business longer, then it is worthwhile for them to do so.

Other times, you might see directors buy small amounts of shares (relative to their wealth) after the share price has retreated, but at higher prices than when they were not buying, just a few months ago. In that case, you have to question whether the purchases are about capital allocation, or manipulating appearances.

That said there are certain combinations that I find attractive. When a company has a new CEO, and that CEO buys a meaningful amount of shares relative to their salary, I consider that a sign that the new leader believes that they are in a position to create value for shareholders. Generally speaking, I’d look to see a CEO with cash remuneration of about $300,000 spend about $100,000 on shares before I find it particularly meaningful.

If a CEO is paid less than average for a company of that size, and they are spending a meaningful part of that salary on shares, then it’s a stronger indication of their confidence. Finally, I also look to see if other board members own a meaningful amount of stock. Generally speaking, I think insider ownership indicates more shareholder friendly policies.

Like Peter Lynch, I look for both insider buying and high insider ownership as a sign that a company’s leaders think that the share price will go up. But it is only ever a sign, not a guarantee.

Perhaps the most fitting end, though, is another Peter Lynch Quote on insider ownership, and management remuneration. He said:

“When management owns stock, then rewarding the shareholders becomes a first priority, whereas when management simply collect a paycheck, then increasing salaries become a first priority.”