In their search for complete information on businesses,
investors often overlook one very important clue. In most
instances no one understands a business and its prospects better
than the management. Therefore investors should be encouraged when corporate insiders invest their own money alongside that of shareholders by purchasing stock in the open
market.
It is often said on Wall Street that there are many reasons why an insider might sell a stock (need for cash to pay taxes, expenses, etc.), but there is only one reason for buying.
Investors can track insider buying and selling in any of several specialized publications, such as Vickers Stock Research.
The motivation of corporate management can be a very important force in determining the outcome of an investment.
For example, the management of a company whose stock sold at $25 with an underlying value of $50 could almost certainly boost the market price by announcing a spinoff, recapitalization, or asset sale, with the result of narrowing the gap between share price and underlying value. The repurchase of shares on the open market at $25 would likely give a boost to the share price as well as causing the underlying value of remaining shares to increase above $50.
Obviously investors need to be alert to the motivations of managements at the companies in which they invest.
It is often said on Wall Street that there are many reasons why an insider might sell a stock (need for cash to pay taxes, expenses, etc.), but there is only one reason for buying.
Investors can track insider buying and selling in any of several specialized publications, such as Vickers Stock Research.
The motivation of corporate management can be a very important force in determining the outcome of an investment.
- Some companies provide incentives for their managements with stock-option plans and related vehicles. Usually these plans give management the specific incentive to do what they can to boost the company's share price.
- While management does not control a company's stock price, it can greatly influence the gap between share price and underlying value and over time can have a significant influence on value itself.
- If the management of a company were compensated based on revenues, total assets, or even net income, it might ignore share price while focusing on those indicators of corporate performance.
- If, however, management were provided incentives to maximize share price, it would focus its attention differently.
For example, the management of a company whose stock sold at $25 with an underlying value of $50 could almost certainly boost the market price by announcing a spinoff, recapitalization, or asset sale, with the result of narrowing the gap between share price and underlying value. The repurchase of shares on the open market at $25 would likely give a boost to the share price as well as causing the underlying value of remaining shares to increase above $50.
Obviously investors need to be alert to the motivations of managements at the companies in which they invest.
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