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The Smart Money Playbook: The DIY investor's guide to profiting from insider moves

Nobody knows stocks better than the insiders and institutions whose job it is to research them. Here’s how you can piggyback these experts, bringing you their edge without the cost.

Introduction to Smart Money principles

CEO of Stockopedia
Ed Croft
CEO of Stockopedia
Ben Hobson

Who are the smartest stock pickers of them all? Over time, the wealthiest men of all have either been those who have invested in their own businesses from the ground up or those who have consistently picked the best stocks. Clearly, Bill Gates and Warren Buffett spring to mind as standout examples, but they are just the tip of the iceberg.

There are thousands upon thousands of company insiders and institutional money managers making intelligent decisions day in and day out. These professionals spend all of their working lives considering how to allocate their capital as profitably as they possibly can. How on earth can we, as individual investors, hope to compete?

The good news is that we don’t need to compete - we can instead learn to read the signals these investors leave behind and change the rules of the game.

Here, we define the ‘Smart Money’ as Company ExecutivesInstitutional Fund Managers and their Research Analyst advisors. Their powerful forecasting abilities and intimate access to corporate information are beyond the reach of most individuals. Yet the tell-tale signs of what those closest to companies really think are left in the trail of their actions, holdings, trades and announcements.

Years of academic research have found smart money signals to be excellent at predicting future share returns, yet most of them are ignored. Studies have found that investors often make poor investment decisions by misunderstanding director dealings, institutional holdings and broker research.

We’ve spent countless hours analysing these research papers from sources far and wide and summarised the conclusions in the following articles. Here’s a taster of just a few of the key findings:

  • Portfolios constructed using the top 25% highest conviction positions held by fund managers return beyond 23% per year.

  • When more than three directors in the past three months have bought shares in their own companies, returns on average are 2% per month higher than the market.

  • Analysis of UK insider dealings activity between 1994 and 2006 found that combining director buying signals with a value and momentum strategy produced an annualised return of 23.5%.

  • Stocks which beat analysts’ earnings and sales forecasts have been found to outperform the market by 5.3% over the subsequent six months.

  • When short sellers are being ‘squeezed’ and the level of short selling interest in a stock is falling, it can be a sign that its outlook is improving and the price may rally hard.

In the following articles we’ve explored the most important signals sent out by company insiders, institutional fund managers, short sellers and research analysts. By understanding precisely how, when and why these players trade shares it’s not only possible to piggyback their ideas but actually invest more effectively than they can. With powerful information at hand, private investors can move quicker and more decisively than cumbersome multi-million pound funds and even take advantage when smart money investors don’t see eye to eye.

We hope you enjoy this guide and can put our findings to work. Safe investing!

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