The psychology of following insider buying

Insider buying, publicly disclosed purchases of company stock by executives and directors, is a real, trackable signal. It's also frequently misread, since insiders buy for many different reasons and on a much longer timeline than most traders are working with.

Worth checking before you act on it:

• Buying by multiple insiders around the same time, which carries more weight than a single purchase.
• The size of the purchase relative to the insider's existing holdings and typical compensation, a token purchase means less than a meaningful one.
• Whether the buying follows a period of weak stock performance (often more informative) versus a period of strength (often less informative).
• The insider's stated or historical time horizon, some insiders are known long-term holders, others trade more actively.

1. Copying a signal without copying the context. An executive buying shares might be signaling confidence, or simply diversifying compensation, or buying at a level that only makes sense against a multi-year horizon a shorter-term trader isn't working with. Following the trade without understanding the insider's actual reasoning turns a real signal into a much weaker one.
2. Treating one purchase as conviction. A single, modest insider purchase gets treated with the same weight as a coordinated, large buy from multiple executives, when the two carry very different information value.
3. Ignoring insider selling as noise while treating insider buying as signal. Insiders sell for many mundane reasons (taxes, diversification, planned schedules), which is fair. But applying that same skepticism only to selling, and full credulity to buying, is an inconsistent read of the same kind of data.
4. Expecting a near-term move on a long-term signal. Insiders often buy with a multi-year horizon that has nothing to do with a near-term catalyst. Expecting the stock to move quickly because an insider bought is a timeline mismatch, not a bad signal.

• Check whether the purchase is from one insider or several, and how large it is relative to their existing position.
• Look at whether the buying follows weakness or strength in the stock.
• Set your own time horizon independent of any assumption about the insider's, since it's rarely disclosed.