I like to know who is buying into a company or selling it off before I plough money into its stock.
No, I'm not talking about sounding out my knowledgeable colleague, a seasoned investor who preaches a buy-and-hold strategy.
Neither am I talking about mirroring the moves of my broker, who in all fairness has amassed more strikes than misses.
Before I pick a stock, I do my homework and drill down into the company's earnings and the quality of its management.
But I want to make my money work harder for me.
And to achieve this, I pay attention to what the 'smart money crowd' is doing. These are the people who have an intimate knowledge of the company.
You see, when directors of a public company buy or sell shares in their company, their trades are typically captured in filings to the Singapore Exchange (SGX).
These filings, which are readily available on the SGX website, reveal a wealth of information. For starters, they tell me who is buying or selling stock in the company.
Names that have popped up in such filings include SingTel group chief executive Chua Sock Koong, Keppel Corp senior executive director Choo Chiau Beng and CapitaLand president Liew Mun Leong.
How many shares did they dispose of or acquire? What was the effective date of change in their stakeholdings? At what price were the shares traded?
Early warning signs
As I study the filings, scrutinising each director's move, the answers to these questions (and many more) are revealed.
Of course, one cannot completely divine their intentions.
Just because senior executives of a company sell their stock in it does not always mean there is bad news ahead for the firm. Perhaps they need to raise cash, pay for a month-long ski vacation to the Alps or, as one director shared with me some time ago, finance their children's education abroad.
Still, there are many instances when the timing of stock sales by top executives has been a great early-warning indicator.
My friend sold his Enron shares when insiders were dumping its stock just before the energy firm imploded in the United States in 2001. Enron's stock price plummeted after a series of revelations involving irregular accounting procedures that bordered on fraud.
Go to any good bookstore and you should be able to find a tonne of literature describing how insider activity might offer 'buy' or 'sell' signals for individual stocks.
Going by one theory, you know trouble is brewing when three or more executives, rather than a solitary individual, start trading.
That mantra saved me from tumbling into a cesspool of potential losses last year, when I was hunting for a stock that could help me beat the paltry interest my money was earning in a savings account.
In June last year, I was ready to part with my money for shares of the widely traded Cosco Corp, until I went through the SGX filings.
Some of Cosco's directors were selling the stock en masse that month, so I told myself, 'Wait a minute. Maybe I should hold off my purchase until July.'
I had a niggling fear that I was overreacting. After all, the Chinese shipyard group had been posting record earnings and clinching blockbuster contracts that sent analysts into ecstasy.
July arrived and the selling activity continued. August, September, October and November rolled in - the directors kept whittling down their stakes, rather than calling a halt as I had hoped they would.
Cosco shares hit a high of $7.90 in October last year before slumping to $2.88 in March this year - a 64 per cent plunge in stock value.
Today, the filings paint a different story.
With Cosco shares languishing near their year-low, interest in the counter is returning. Since March, the number of purchases by the company's directors has risen considerably.
Delving deeper
All over the world, seasoned investors realise that insider trading activity, as it is called, can be a valuable barometer of broad sector and market sentiment.
In some quarters, the study of insider trading has developed into a whole science. Some regulators use computer algorithms to pick up suspicious trading activity by insiders.
But here is a word of caution: Sometimes, it is difficult to tell the real story behind the 'buy' or 'sell' signals.
Hence, another theory spouted is that a director's decision to buy or sell his company's stock is meaningful only if it is contrary to what he should logically do.
Let me illustrate. In April, just when all the chatter was about the property market slowing down, veteran banker Wee Cho Yaw, through his investment vehicle, CY Wee & Co, bought up 400,000 United Overseas Land (UOL) shares for $3.972 apiece.
Positive sign? Perhaps, considering that Mr Wee, UOL's chairman, last made a purchase in November last year, when he bought one million shares - at a much steeper price of $5.048 apiece.
But if you look at the bigger picture, the story behind the 'buy' signal gets a little murkier.
After all, Mr Wee has been snapping up UOL shares for several years now, acquiring them from as low as a dollar-plus to as high as about $5.
Since Mr Wee has had a good buying history in UOL, this purchase in April is not exactly what you would call an unusual deviation from the norm.
Sure, second-guessing directors' trades is not a fail-safe way to pick stocks, and even top executives can sell or buy at the wrong time.
In some instances, it could be a matter of luck as much as anything else. In any case, simply taking a cue from these directors will never replace diligent research.
But given a choice, I'd rather know what the smart crowd feels it's smart to do.
This article was first published in The Sunday Times on Jun 1, 2008
