Getting into a stock before management does is basically impossible.
As a retail investor, you are waiting on the sidelines while management, institutional investors, and friends & family of said management get the cheap early paper.
The game is rigged against the little guy, and you are powerless over having to wait to get into a company. That being said, there are tactics retail investors can use to give themselves a leg up over other retail investors.
As Gordon Gecko famously said, ‘if you’re not inside, you’re outside.’
Which is true.
Now, researching potential companies to invest in takes hours. I won’t get into fundamental/technical analysis here, but, I would suggest spending 20-30 minutes searching Google/Reddit/old WordPress blogs to see whether or not management has been involved in any prior investigations or scams before you even lift a finger.
Then do your fundamental/technical analysis and start to build a picture around how the company is financed.
Most importantly it’s about knowing how much stock management owns, and at what price. As an investor, if you have this information you can start to predict their behavior, which is often easier to predict than the market itself.
The key here is instead of only trying to get a cheap stock, try and get a stock cheap in relation to where insiders own it. If a company is trading at $0.60 per share and the most any insider got in for was $0.10 you are at a huge disadvantage, especially if insider ownership is high.
So while $0.60 per share looks ‘cheap’, imagine a company trading at $1.00 per share, but a large portion of management own stock at $1.20. Getting in at $1.00 is going to give you some safety, especially on heavy insider ownership.
If the company’s share price is lower than the price the money was raised at you could be getting a bargain, especially if the raise was recent and reflective of the company today.
The company and its investors will also be more incentivized to move the stock’s share price higher, as they want to make a profit. Again, this is probably the easiest thing to predict in the market.
Ignoring insider holdings not only takes away the advantage of somewhat predicting management’s behavior, but it can also get you into a stock where management has checked out.
Like this guy.
Try to get on the same page as management.
If you get into a stock at $0.60 and insiders got in at $0.10, they might have checked out at that point, especially when we are talking about emerging markets where CEOs start new ventures every few years. As an investor you want management to be totally bought into the company, and more importantly, bringing the company’s share price higher.
Also, it’s important to take notice if there has been a lot of insider selling recently if insiders are moving large amounts of their position it could mean they know something bad is coming down the pike, or it could be for personal reasons unrelated to the stock, but I would bank on it meaning something. If there is a pattern of insider selling, I would probably not go near the stock either, unless management provided a strong enough reason.
Prices & dates
Once you have these prices and dates, you can begin to at least make some predictions on insider activity.
So how do you find this information?
There a couple of ways, you can use the SEDI database, although I find their interface archaic and time-intensive, so I prefer using CEO.ca’s API where you can do a quick and easy search of all insider holdings by insider last name or company ticker.
Below I searched for the MindMed (MMED.NE) ticker.
On the right-hand column you will see the insider’s holdings, and numbers in red and green. in green are shares/options/warrants that have been acquired, and red are sold. Take notes on how much insider shares are worth. These often match company private placements or granted options. For both private placements and options granted there should be an accompanying release on the company website.
In the press release, you should find options’ strike price and expiry date, as well as any unusual hold periods on private placements, the standard is 4 months. If the company doesn’t have the release posted, search through news wire or on SEDAR as a last resort, similar to SEDI, SEDAR isn’t the most user-friendly or time-efficient when searching for press releases, stick to SEDAR for financials and MD&A’s.
Unfortunately, this type of surveillance is really only applied to company insiders, not hedge funds or VC funds who may also be involved in trading large volumes of the stock, contributing to volatility. As an investor, you will never get the full picture, but getting as much information as possible, even beyond fundamental and technical analysis makes your investment strategy a bit more predictable.
It’s also not that uncommon for insiders to make trades through family members’ names, so there will be some data slippage on that, but again, you want to try and get as close as you can to understanding the full picture.
At the end of the day, the easiest thing to predict in stocks is that smart/early people will make money, and unprepared/late people will lose money. Following the insider’s footsteps will at least put you closer to the camp that is making money.