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Why Are Insiders Selling Stocks?

From the depths of the Great Recession until the Covid crisis the stock market kept going up despite predictions of a crash. The Covid Crash hit the market and when the Fed intervened the market started back up again. Is the stock market going to head up forever? If that is so, why are insiders selling stocks? What do they know that we don’t? We got to thinking about current insider stock selling after reading a recent article in Market Watch about record selling by insiders.

How Often Does the Market Correct or Crash?

On average the US stock market suffers a 10% or greater correction every two years. It experiences a 20% or greater crash about every seven to eight years (1968-70, 1973-4, 1980-2, 1987, 2000-2, 2007-9, 2020). Crashes typically take longer to recover from. For example, the Dot Com 2000 to 2002 crash took 929 days to recover to pre-crash levels and the 2007 to 2009 Financial Crisis crash took 517 days to get back to pre-crash levels. Most long term investors look at market corrections as opportunities to look for stocks with good intrinsic value and buy at discounted prices. If they can expect their shares to appreciate again after a correction and recovery, why are insiders selling stocks?

What Do Insiders Know About Their Stocks?

Factors that drive the stock market include the amount of cash available for investment. 2021 has seen the highest stock inflows in decades which Market Watch says may have kept the market propped up. Thus strong companies kept going up and average companies did not lose ground. However, the folks who run companies do not need to wait for annual or quarterly reports to know how their companies are doing. And, they often act on that information. The average investors only finds out about this when reports of filings with the SEC emerge.

We’ve had all-time record levels of insider selling, meaning that the top executives, the people that are the most experienced investors in the world, have been pretty much spending all year getting rid of their stakes in some cases and unloading huge amounts of shares they have accumulated for decades.

Examples include Elon Musk, the chairman of Charles Schwab, and the heads of Amazon.com, Meta (Facebook), and Apple. You cannot blame folks who have converted stock options which are part of their compensation for turning those shares into cash for whatever purposes they choose. But, the timing is always suspect and when insiders sell instead of holding onto their appreciating stock one needs to be concerned that they know something that we don’t and that their stocks are due to correct or even crash.

Why Are Insiders Selling Stocks?

Inexperienced Investors and Bear Markets

There are many young investors today who have never seen a prolonged bear market. What they saw of the Covid crash and recovery was not good preparation for a crash of the magnitude and duration of the Financial Crisis, Dot Com Crash, or, for that matter, the 1929 to 1933 crash. Robinhood comes to mind as a platform that makes investing and trading available from a smartphone with a few clicks. Experienced investors will heed warnings of trouble in the market such as insider selling. And, they will be patient enough to pick up bargains when the next correction or crash bottoms out. Our concern is for new investors who have never had to endure a prolonged bear market.





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