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Insider,Outsider and Bystander

May 2, 2010

There was a brilliant comment talking and discussing about the role of insiders and the probable  advantage they have, when an investor works on fundamental way. The comment can be found here

Agreement

I agree to a lot of extent in following what the insiders do. Hell, I dont attribute any credit to my trading skills(even if I have any) for above average fund performance. I solely attribute to following the insiders.
Any other person reading it, shouldn’t infer that I have my cronies inside companies of whose shares I have held in portfolio. I believe price shows everything.
I dont care, who you are.
An elephant cannot help but leave trails while running through the wheat field.

A Different Lens

But that being said, I would like to pose a different view. A slightly different view. I wont really say, insiders are not the only one worth looking for. The Operative Word/Philosophy is: Follow the Smart Money.

And smart money is not a label, its a group whose members and constituents keep changing. And almost always this smart money is well poised in information the crowd doesn’t have.
And given the fact, that information is information, its not really necessary to believe that, information is only the fiefdom of the select officials of the company. By the way, I dont only consider the immediate short term new developments as information.

I am including all information, social or material, fungible or infungible everything involved in making an investment decision, to be classified as “information”.

Further on, company officials are also people like us. While they do have an advantage,which comes with their office but not always. Even common folks can see shifting economic paradigms far faster than those people down in the field.Often faster. Often in an unbiased way.

Hence, it is my opinion that, being humans they also have the same limitations as us. From a perspective of humans,we are standing in the same platform, rowing the same boat. We have the same psychological biases as they have.
That my reader, is a formidable level playing field.

Stretching further , that often my studies have shown insiders positioning up just before a news is about to hit the market. They are purely playing the information arbitrage game.
Whether it is company mid level managers scaling up, before  new business information is made public, or top CEOs offloading their stake,before the news of debt ridden balance sheets go public.Pure information arbitrage.

But then, the true test of a fundamental investor, is to see what no one sees. Even if it is the good news, even if its the bad news. Sometimes even before the real folks see it.

Do fund houses have an “edge”?
I dont know. Yes they do, my “rational way of the world” mind says.
Can I do something about it?
Not a lot.
Can I profit from it?
Certainly(Hint: Charts)
Do I want to profit like that?
Maybe yes, maybe no.
Is there any other way to profit from it?
Hint: Do your own homework.”Anticipate” quality.

That, my dear reader is the thought process, I guess any non-fatalist, non-defeatist, self-reliant man will do.

Quality is though, a very strong point of debate, for some: IPOs equal to quality(by the way, they are the most hideous forms of investments known to man. Personal finance fanatics curse ULIPs. I curse IPOs), for some Growth Stocks equal to quality.

My only point is: Be self-reliant, be self-independent. Dont rush in with the fools, nor fly in with the pigs. Convince yourself, that the so called experts know not much more than you(and you can easily surpass them, if you do your own homework).

And very often, fundamentalists choose companies which are slow changing, like utilities(not much big fan of that either). So in that way, you can knock another log from the high grounds of insiders.

Also,

This was a point to point parry to “insiders take the cake”, talk. I am not defending fundamental investing. “Dont be so righteous,you are not that great”, there is a Malayalam proverb. So, I wont make the mistake of defending something especially an opinion, I am yet to give a full 360degree run. But I would also like to ask, do you really think, company CEOs meet fund houses two days before, they are going to make their worthless balance sheets public, and say, “Hey brother, look, thanks for everything but see, the party is over?”.

Or might be, before an important piece of good news hits the market, he is going to go up and talk to the big fund houses, and say, “hey, buy some, you know.”

Yes, they will do that, but not before they load up theirs. And often only because of purely social and reasons of friendship (not with FIIs or MFs), but with locals. Say, long lost childhood friends or somebody else.I think, it would be better not to even repent that none of your friends/relatives are in a position of influence in society 🙂

Let us, get this myth away from our head that FIIs are the smartest folks around.The locals eat the FIIs and MFs day in and day out.

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