Tuesday, February 17, 2009

Einhorn on Insider Buying

I recently re-read Fooling Some of the People All the Time, and will be sharing some quotes from it directly related to how Einhorn views different aspects of investing.
Speaking of insider purchases, Allied management made several small insider purchases between my speech on May 15, 2002, and the end of the year. As one shareholder asked me, "Allied insiders have been buying shares and not selling. In fact, I think the last insider sell was more than a year ago. This does not seem like the behavior of a management that is hiding something. If, as you suggest, they are privy to negative information that likely would be detrimental to the stock price, it's inexplicable to me that they would put more of their own money at risk."

This, of course, is a straightforward and logical analysis. I agree that insider purchases are generally bullish. However, in this case, the insider purchases were so small relative to the financial wherewithal of the participants and to their existing stakes in the company that they appeared to be simply an effort to "signal the market" with news of insider purchases, thus reassuring retail investors like this fellow. In context, this was not a serious effort to increase their stakes by taking advantage of discounted prices.

...If insider purchases are indiscriminately believed to be a bullish indicator, bad actors can use them as false indicators at desparate times. Dennis Kozlowski and Mark Swartz of Tyco each spent about $15 million to signal the market with insider purchases in January 2002. In June 2005, Kozlowski and Swartz were found guilty on twenty-two of twenty-three counts of grand larceny and conspiracy, falsifying business records and violating business law. They were ordered to pay fines and restitution of over $200 million and given lengthy prison sentences.
The above is from page 131 of the book. It shows that Einhorn does not limit himself to rules, such as insider purchases are good, but looks at any one action by management in the context of everything else he knows and only then reaches a conclusion.

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