Those who read my columns know that I'm sometimes a sucker for cheesy-but-true movie wisdom. This is another of those times, and today the subject is the '80s classic Wall Street starring Michael Douglas and Charlie Sheen.
The seminal moment for me in the film comes in a meeting between Douglas' Gordon Gekko and Sheen's Bud Fox in Gekko's downtown Manhattan office. There, Gekko lays bare his investing philosophy: "Bud, the most valuable commodity I know of in this business is information." The implication, of course, is that Fox must get insider information to be a profitable investor.
Not surprisingly, a few frames later Sheen is shown racing through Manhattan, tailing Terence Stamp's Sir Larry Wildman as he rushes from meeting to meeting. Before long he discovers that Wildman is going to make a play for fictional Anacott Steel. When Gekko hears the news, he loads up on shares, figuring Wildman will need to pay him a premium. The scam works, and Fox is suddenly on his way.
Betting on the insider
What's the lesson? Cheat your way to the top? No, of course not. Instead, it's that investing alongside those already in the know -- insiders such as directors and company management -- is generally more profitable than not. The reason for this is simple: Insiders wouldn't hold shares unless they had a good reason to believe they'd see market-beating returns. And they have access to more information than you or I do. That's why Motley Fool co-founder Tom Gardner demands a high degree of insider ownership in each of his recommendations for Motley Fool Hidden Gems.
The strategy has turned out well thus far. Consider FARO Technologies (Nasdaq: FARO ) , a big winner in the portfolio; it's doubled since Tom's initial recommendation. Though executives have taken plenty of profits over the past six months, insiders still account for nearly 20% of the shares outstanding, according to Yahoo! Finance. That's a good sign. An even better one is when insiders are buying.
A visit to the oracle can do your portfolio good
A while back, fellow Fool Bill Mann introduced us writers to a tool called Form 4 Oracle, which I now introduce to you. Its purpose is to track the buying and selling activity of insiders at publicly traded U.S. corporations.
Although it takes its information from public filings reported to the Securities and Exchange Commission and stored in its free EDGAR database, Form 4 Oracle does much more than simply repurpose content. For example, using EDGAR, you'd have to open every form 4 filing to track buys and sells for insiders. Form 4 Oracle, by contrast, lists every transaction by date and by insider. It also aggregates total buying and selling for the past 30 days, three months, and six months. Having all that data immediately accessible can be exceptionally useful in searching for stock ideas. How useful? Let's take a look at two examples.
Don't trust the hype
A while back, Rainmaker Systems (Nasdaq: RMKR ) appeared on the main page of Form 4 Oracle because of a spate of insider buying at the sales and marketing outsourcing firm. A check of the press release archive showed this to be the result of a $2.7 million stock placement with private investors and management that was completed in June. But investing is never that simple. So I dug deeper.
I soon found that three months prior, legendary investor Peter Lynch snapped up roughly 7% of the company for somewhere between $0.54 and $0.70 per stub. You could have done the same. How? You could have dug into the filings available through EDGAR. On March 15, Mr. Lynch filed a statement with the SEC revealing the purchase. One month later, Rainmaker issued a proxy statement showing all holders of at least 5% of the company's stock as of Feb. 28. And as one might expect, Mr. Lynch wasn't on that list, as the proxy statement showed material owners as of Feb. 28. Yep, it pays to do homework.
Is your stock really overvalued?
I've mentioned before that I own shares of Barnes & Noble (NYSE: BKS ) . When I invested, it was because I saw an opportunity to acquire a growing firm at a huge discount to its potential cash flow. The stock has paid off handsomely for me over that time, up roughly 70% in a year. With the shares running so far so fast, I had expected to take some profits.
But then chairman Leonard Riggio started buying shares. Lots of shares. More than 400,000 over the past 30 days, in fact, according toForm 4 Oracle. Riggio's buying pegs his direct ownership of the bookseller at more than 12%. If you include his interests in other entities for which he buys shares to be held in trust, Riggio owns more than 18% of the company.
Seeing those numbers prompted me to re-examine some previously conservative assumptions, and I came away with a fair value north of $50 per stub.
Take a lesson from the master
Gekko, though he may be a figment of filmmaker Oliver Stone's imagination, has it right in Wall Street. Information is the most valuable commodity in investing. Getting it isn't easy, of course. Fortunately, there are tools such as Form 4 Oracle and Yahoo! Finance to help.
And then there's us. We've got an already large and growing team of analysts who are investors just like you, including yours truly. So whether you favor wallflowerish small caps such as United Fire & Casualty (Nasdaq: UFCS ) , swashbuckling informed speculations such as Vertex Pharmaceuticals (Nasdaq: VRTX ) , steady-eddy income investments such as Unilever (NYSE: UL ) , large-cap bargains such as Anheuser-Busch (NYSE: BUD ) , or superior mutual funds, we've got something for you. Heck, we've even got the goods on how to retire early. Best of all, you can try any of our newsletters free for 30 days. So go ahead, give 'em a spin.
But even if you choose not to, do us a favor: Stop committing yourself to mediocre returns. You can do better. You needn't risk jail or rush-hour Manhattan traffic to get there, either. All you need is a little information.
Fool contributor Tim Beyers owns shares of Barnes & Noble. He hears great things about the new Harry Potter novel. You can find out what else is in Tim's portfolio by checking his Fool profile here. The Motley Fool has an ironclad disclosure policy.