Don't Listen to the Insiders

FREE: A whole cottage industry has formed around tracking insider buying and selling, but JJC thinks this approach is misguided.
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Can you imagine a newsletter that flagged you on such hot stocks as

Sun Micro

(SUNW) - Get Report

,

EMC

(EMC)

,

Exodus

(EXDS)

,

Broadcom

(BRCM)

or

Redback

(RBAK)

?

Smarter Money: Join the discussion on

TSC

Message Boards.

Or how about one that gave you the heads up on

Veritas Software

(VRTS) - Get Report

,

Extreme Networks

(EXTR) - Get Report

,

Lycos

(LCOS)

,

Allaire

(ALLR)

,

Ditech Communications

(DITC)

and

Ariba

(ARBA)

? How much would you pay for one that told you about those rocketships in advance?

I pay thousands of dollars for them, and I think I am about to cancel them. Everyone of these companies was flagged all right -- that is,

red

-flagged by some of the myriad journals I get dedicated to insider buying and selling. If you paid any heed to these charlatans you would have sold these stocks, because they are among the ones that are most sold.

And the ones that they told you to buy based on insiders?

Conseco

(CNC) - Get Report

,

Xerox

(XRX) - Get Report

, the toymakers and a host of really bad REITs.

Yep, there's been a giant cottage industry, embraced by all forms of the media, including this site, that reviews what insiders are buying and selling. That in itself, could be a positive. Ten years ago nobody was focused on it. Now, though, everybody is, and it couldn't be a worse, nonpredictive indicator. For almost this whole decade the folks who put these newsletters together have never had a good word about Sun or

Cisco

(CSCO) - Get Report

or EMC or a host of other great companies.

In the meantime, they praise a host of second-raters, leading you very much astray. In fact, if you bought the list insiders "most-hated" and sold the list insiders "most-liked," you would have made a fortune. What causes this curious dichotomy? Quite simply, it is the new economy, where people are paid in stock, so much stock, that it would be stupid to buy stock in the winners, and commonsensical to sell, because it is income. We should be more concerned if they didn't sell! How would they live?

In the meantime, the buyers may simply be reacting to the same perennial low valuations that the stock market places on the mundane. They buy out of anger or out of a desire to show they are on the team. Often they don't put any real money out, but make token buys, just enough to get flagged positively by this cottage industry.

Just last week

Tultex

(TTX)

got delisted, but not before inflicting severe damage on many peoples' portfolios. Why? Probably because every one of these services highlighted the concentrated insider buying at this company. Twenty-nine different times in the year leading up to its delisting, Tultex execs bought. I repeatedly figured something good had to be happening here. Of course all of that buying however, only amounted to $290,000! What a false signal.

So, before you act on either insider buying or selling, remember, it doesn't work as an indicator. In fact, it is a contraindicator.

It won't make you money.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Sun Microsystems, Exodus, Redback, Ariba and Cisco. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.