In the month of March, Apple (AAPL) insiders have been dumping their stock. It is said a picture is worth a thousand words. There is no picture here, so the table below will have to do. I am purposely not regurgitating in one thousand words the contents of the table. The words are better used to describe what this selling means.
Gauging sentiment is an important part of my investing method. For the purpose of analysis, these days we gather sentiment data from individual investors in four classes in addition to the data from institutional investors.
For an astute investor, who has been managing an Apple position in the context of a diversified portfolio and has appropriate risk controls in place, this selling by insiders is meaningless. Most of the stock has been sold under Rule 10b5-1 trading plan. Executives have inside information. This rule is designed to control transactions in a stock in a manner that avoids accusations of insider trading.
In theory, the concept of selling when insiders are selling and buying when insiders are buying sounds great. It is often said, “Who knows the company better than the insiders?”
I have tested the theory over a large data set. My conclusion after extensive rigorous testing is that for the most part insiders are not good market timers.
There are only two instances where insider trading data is helpful. First when a high ranking insider buys stock in the open market with his own money, and size of the purchase is material in relation to that person’s net worth. In lots of cases, such determination is not practical because of the difficulty in getting reliable data on a person’s net worth.
The second helpful instance of reading what insiders are doing is when you see a cluster of selling by a large number of insiders that materially reduces their holdings. Such selling should not occur in close proximity to vesting of restricted stock or options.
The implications are different for those who have not paid attention to risks and Apple has become a disproportionately large part of their portfolio. We took partial profits in Apple stock at $360 and $525, in part, because Apple was becoming too large a portion of the portfolios. Our plan is to judiciously time further trimming if the stock goes higher.
My method is focused on generating high risk adjusted returns, i.e., that is returns in excess of those commensurate with the risk taken.
From the large number of messages I receive from investors, I see that there is a widespread belief that there is no risk in Apple stock because iPhone 5 and iTV are coming.
Apple cultists may want to take notice that the top brass of Apple clearly does not believe that Apple stock going to $1000 is a sure thing, otherwise they would not be selling, no matter whether it's part of a 10b5-1 or other transactions.
Blind faith is the hallmark of cultists. The following excerpt from an email sums up how Apple cultists think:
You are wasting your time here……. Other analysts on AAPL are all silly? You are smarter? A nuclear physicist, so what? Apple will be above $1000 soon, no matter what you said……. You took profit at $360 and $525, shame on you.
Please note the definitiveness of Apple going to $1000 in the above excerpt, I find it common in emails and comments that are civil as well as those that are hateful.
About Me: I am an engineer and nuclear physicist by background. I have founded two Inc. 500 companies, and have been involved in over 50 entrepreneurial ventures. I am the chief investment officer at The Arora Report, which publishes four newsletters to help investors profit from change. Please feel free to write me at Nigam@TheAroraReport.com. You can follow me here and get email notification when I publish a new article.
Full disclosure: Subscribers to The Arora Report are long Apple from $131 and have taken partial profits at $360, and $525.
