How to Invest Like an Insider

The numbers are in, and they do all the talking.

Corporate insiders’ stock purchases have beaten the S&P 500 by an average of 5% from 2015 to 2020, according to an analysis by TipRanks. 

If that doesn’t sound like much, consider that the typical equity investor has managed an average annual return of 5.02% over the last 20 years. That would turn $10,000 invested in 1992 into $26,634.

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That actually lags the S&P 500, which has returned an average annual gain of 9.22%. Investors who simply matched that overall market return would have turned every $10,000 into $58,350.

But remember: Insiders’ stock purchases have beaten the S&P 500 by up to 5% on average in recent years. That insiders’ edge would allow them to turn every $10,000 into $142,837. 

Surveys on average investor returns may differ somewhat. But overwhelmingly, they reveal that your gut instinct about the stock market is correct: Insiders make much more money from investing than ordinary investors do. 

There are a number of reasons for this, but the biggest is the information edge. A company’s CEO knows just about everything about the company’s prospects, and potential catalysts and drags on earnings. They can only legally trade based on publicly available information. But even when taking only the public information into account, regular investors would have a hard time catching up to the CEO’s level of knowledge and expertise. 

It’s not a coincidence, for example, that a portfolio tracking insiders’ trades could yield a staggering 23.5% a year, according to a 2008 finding from quantitative analysts working at Citigroup Inc. C. 

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That’s a higher rate of return than the legendary Warren Buffett’s Berkshire Hathaway has averaged over its 58-year existence. 

So what are regular investors to do? 

Any investor hoping to at least partially match the prodigious returns that insiders usually manage should keep one observation in mind from the legendary investor Peter Lynch, who noted that insiders can sell their shares for any number of reasons. But there’s only one reason to buy them: They think the price is going up. 

Benzinga is following a number of companies that have some heavy hitters on board.

After all, it’s not just CEOs and other corporate insiders that tend to do well while ordinary investors struggle. Venture capitalists like “Shark Tank’s” Kevin O’Leary, also known as Mr. Wonderful, and Activision Publishing Inc. Founder Howard Marks have already scored a series of home run investments that multiplied their money – and now they're building a company that would let ordinary investors do the same.

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