This column was originally published on RealMoney on Aug. 4 at 1:25 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Insiders buy when they want to make money. Insiders sell for a host of reasons: taxes, divorce, lifestyle or just good financial planning. Yet the media love to focus on it -- so do the short funds -- because it is accessible and so easily compiled.
In fact, insider selling documents have inspired a whole silly cottage industry of newsletters, all purporting to get you out of trouble before it happens.
But does it work? Does anyone ever ask that? I can tell you that as a manager who has pretty much used every single piece of public data available, the answer is a definitive no.
In fact, it is worse. Insider selling data would have kept you out of the hottest tech stocks in the 1990s and the hottest biotech stocks in the last five years.
Lately it's been the homebuilders that have hit the radar screen of these cottage industry players. These newsletters are screaming sell, telling you to get the heck out of this group.
But let's take a look at how you would have done if you had listened to these pop-offs. Consider the chart below.
Yeah, I know. The only way to read this chart is to buy the stocks that are most sold, not sell them. Yet so many people won't even do this amount of homework, they are so quick to nail these executives and these industries. How could it be so wrong?
I have a theory. As someone who has spent his whole life advising rich people -- and the people behind these companies are most certainly rich -- consider that the uniform advice anyone gives to these people is, "Be sure to take something off the table."
I am friendly with or know everyone behind these sales. I know the advice they got. In some cases, I help give it. That anyone would react to this stuff by dumping these stocks is just plain uninformed.
Why point it out? Because I need you to think harder than this before you sell a great stock. Great stocks are hard to come by. If you flip out on this data, you are just playing right into the hands of the hucksters who shill it and the shorts who promote it.
Don't be a victim.
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