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Tri Star Equity Research. INVESTING WITH MILLIONAIRE INSIDERS. AGENDA. Insider Qualifications and Motivations Rules for Insider Buying Methodology and Sample Characteristics Results Overall Based on Market Cap Based on Insider Type Based on Transaction Size UMI Study Limitations - PowerPoint PPT Presentation
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INVESTING WITH MILLIONAIRE INSIDERSTri Star Equity Research
TRI STAR EQUITY RESEARCH
AGENDA
• Insider Qualifications and Motivations • Rules for Insider Buying • Methodology and Sample Characteristics• Results
– Overall– Based on Market Cap– Based on Insider Type– Based on Transaction Size
• UMI Study• Limitations• Conclusion & Questions
TRI STAR EQUITY RESEARCH
Insider Qualifications and Motivations
• SEC: “in a position to have privileged non-public material information on a publicly listed firm.”- Officer (CEO, CFO, COO, Board Members)- Director (VP)- 10% shareholder
• Motivation: create shareholder value• SELL reasons vs. BUY reasons
TRI STAR EQUITY RESEARCH
Rules for Insider Buying
• Insider trades based on material non-public info fraud (violation of fiduciary duty to shareholders)
• Section 16(b) of the Security
Exchange Act of 1934 – Form 4 reported SEC within 2 business days – Illegal to Buy & Sell within 6 months– To sell insider must own security
TRI STAR EQUITY RESEARCH
Methodology
• Market: all stocks listed in USA (under SEC)
• Sample time frame: Oct 1 to Nov 30 2007
• Event: $1M + insider buy• Data source: Form 4 from j3sg.com
(3x day)
TRI STAR EQUITY RESEARCH
Sample characteristics
10% Owners
47%
Officers 25%
Directors 28%
Small Cap 64%
Medium Cap 31%
Large Cap 5%• 204 transactions
• 4,4 transactions/day
Small 73%
Med 14%
Lrg 13%
TRI STAR EQUITY RESEARCH
Risk Adjusted Returns
• Identifiy historical Betas
• R – β*Rm = α + ε
• Projected in 2 time frames:– 2 months after report– 4 months after report
TRI STAR EQUITY RESEARCH
Results: Overall
2 months 4 months
HPR 0,7% 5,6%
Annualized 4,1% 17,8%
STDEV 22,3% 24,1%
TRI STAR EQUITY RESEARCH
Results: Insider Type
Officer Director 10% SH
2 mo ER -2,8% 1,3% 2,2%
2 mo ER (an) -15,8% 8,2% 14,1%
2 mo STDV 20,8% 19,6% 24,6%
4 mo ER 4,1% 5,1% 7,9%
4 mo ER (an) 12,7% 16,2% 25,5%
4 mo STDV 30,3% 20,4% 24,1%
Outperform 2mo 39,1% 48,1% 41,6%
Outperform 4mo 52,2% 55,8% 53,9%
TRI STAR EQUITY RESEARCH
Results: Market Cap
SML MED LRG
2 mo ER 1,96% -1,42% -2,85%
2 mo ER (an) 12,37% -8,24% -15,94%
2 mo STDV 26,37% 12,04% 15,52%
4 mo ER 5,80% 6,49% -2,85%
4 mo ER (an) 18,44% 20,76% -8,32%
4 mo STDV 26,63% 19,18% 15,52%
Outperf. 2mo 40,8% 46,6% 44,4%
Outperf. 4mo 53,3% 55,2% 44,4%
TRI STAR EQUITY RESEARCH
Results: Transaction Size SML MED LRG
2 mo ER 0,2% 2,8% 1,1%
2 mo ER (an) 1,1% 17,8% 6,8%
2 mo STDV 22,7% 24,2% 18,3%
4 mo ER 5,0% 12,6% 1,2%
4 mo ER (an) 15,7% 42,9% 3,7%
4 mo STDV 24,3% 27,4% 17,7%
Outperform 2mo 43,1% 40,7% 41,7%
Outperform 4mo 56,2% 55,6% 37,5%
TRI STAR EQUITY RESEARCH
UMI Study (2003)
• Nejat Seyhun, professor of Finance at the University of Michigan – Time frame: 1975 to 1995– Historic (vs actual)– Sample random transactions– All sizes of transactions
TRI STAR EQUITY RESEARCH
UMI Study: Results
TRI STAR EQUITY RESEARCH
UMI Study: Results
TRI STAR EQUITY RESEARCH
UMI Study: Results
TRI STAR EQUITY RESEARCH
UMI Study: Results
TRI STAR EQUITY RESEARCH
Limitations
• Relative short time frame to complete research = 2 month population
• Performance time period (2&4 mo)• Particular market conditions (bear)• Some outstanding firms less than 60
months old
TRI STAR EQUITY RESEARCH
Conclusion
• Sample outperforms the market
• 10% SH > Directors > Officers
• MED cap > SML cap > LRG cap
- However Russ2k > SML cap
• Transactions: MED > SML > LRG
• UMI study confirms overall results
TRI STAR EQUITY RESEARCH
Questions
