Investment Intelligence from Insider Trading

Positives-
The book is veritable bible on insider trading based investment. The author has taken 1974 to 1994 insider trading data and then sliced and diced in variety of ways to see what works and what doesn’t. The book tries to answer the question- Are insider trades profitable? can outside investors profitably imitate insiders given various constraints like reporting delays, costs etc. I would say the author has succeeded in answering these questions satisfactorily in this book based on his extensive research in this domain.
The author has also uncovered various insider trading signals with varying strength. He presents each variant with resultant profits for next 3,6 and 12 months.
The author also explores if one can combine insider trading signal with other predictors like Low price to book, Low P/E, dividend initiated, past price action, M&A etc. He takes each predictor in separate chapter and then analyzes it thoroughly. Looking at his research and findings helps us understand why he is considered one of the foremost authority in the world on Insider trading.
He finally gives guidelines and advice on investing based on this research. Insider trading profits had been discussed since 1950s. Still these profits exist in the market as developed as US stock market. That speaks for itself.
Negatives-
Very very sloppy editing and draft review before publication. Some of the mistakes are glaring.
In the last chapter in recommendations he omits advice on how to incorporate past price action and insider trading. He also doesn’t give us the probability of success (beating market returns) if we combine past price action and insider trading signals.
One of the disadvantage of all that extensive research is one can get bit lost or confused in few areas. The example is Active Vs Passive insider trading. He does not tell us when he uses other predictors like P/B one should use active or passive insider trading signal? Or does it matter in the first place? I would again blame this omissions to the poor editing and draft review before publication. what is disheartening is even after 20 years the author has not bothered to correct these errors. He should have come up with new edition with error correction and new research findings in this area. Because the findings in this book are that important.

Overall verdict-
If you are interested in insider trading signals or incorporate such signal in your investing then this is Must Buy book. Although there are editing issues in this book that does not take away usefulness of the author’s research in this often ignored domain. If the author comes up with the new edition. I will buy it even at the risk of most of the insights may remain the same.

Instead of talking about those dirty illegal insider trading, it is a long term study (from 70’s to 90’s) of legal, SEC filed stock transactions by company executives, accountants (insiders) to answer, from pg 317, “Can a potential stock market investor mimic insiders and make profits? If so, what is the magnitude of the profits? What kinds of risks does a mimicking strategy impose on outside investors? Given the risks, is it still worth it?”

By and large, the author did provide answers to the above. Profit for the mimicking is still available, after report delays, transaction costs and the need to mimic over 50 multiple transaction to lower risk. For a 12 mth holding period, the strategy outperforms the market by 2% for buying but underperforms by 3.3% for selling.

You can tell the conclusion is simple, but the author did use a lot of set up, with lengthly coverage of legal issues, before summing it up in the very last 14th chapter of this 341 content page book. As per title of this review, it is well researched, informative but too academic and long.

p.s. One minor complaint: The author should give more details on parameter setting and provide an optimal (profit maximization) strategy on the mimicking. Perhaps he did, but he didnt show it in the book.

Would that more financial books were written this way. Gets straight to the point, backs up conclusions with the data (and not the other way around), and examines various combinations of factors along with insider trading. Compelling.

Better than I thought

This is a very good and thorough book. Seyhun addresses many different ways in which you can gain information from insider trading. He is incredibly thorough. That brings me to the major problem with the book–Seyhun is quite repetitive. The different chapters deal with different aspects of insider trading (for example, the size of the trades, who is making the trades, how many insiders are trading). Each chapter has the same structure. Much of the prose seems to be re-used across chapters as well. This is best dealt with by skimming over some of the repetitive parts while paying close attention to the graphs and tables. A second thing about the book is that Seyhun uses tests of his hypotheses that non-statisticians can understand. This improves readability but makes the book longer (and more frustrating for statisticians).