For those of you interested in the details of insider buying trades, here’s a few notes from Dave Borland. Dave’s been trading insider buy "i-buy" stocks for around eight years and has donated his experience in programming the software I’ve used to evaluate the quality of an insider buy. These notes were taken from a conversation we had last week. – Ilene 
1. Score
The software program we use to monitor the SEC filings generates a score primarily as a function of who’s buying, $ amount, and size of the company. If you spend time watching how stocks trade after a large insider purchase has been filed with the SEC, you’ll begin to see common patterns. For significant buys, the stock will start running often before you’ve seen the information. Time is particularly important for a day-trade, and a high score indicates that there’s a high probability that the trade will be successful. Currently, using this particular scoring system, 53% and above is a strong signal to buy, less than 51% probably won’t work – the parameters may change with market conditions.
2. Commodity Based Stocks, TIE
Dave: "the TIE buy that just came in scored 49%…and it looks like a dud. TIE used to a big moneymaker for me when Simmons the CEO was buying millions. It was an obscure stock then. Doesn’t respond to i-buys much anymore. The whole world is watching metals and commodities. I learned years ago to be extra wary of commodity based stocks for buying and holding. Earnings are very dependent on commodity prices, and insiders may not be able to forecast these any better than stock investors can. There are cases where a commodity stock plunges with commodity prices, then the insiders pile in because they know of sources and contracts with locked in prices. So the external market force that caused the plunge actually doesn’t apply to them. But don’t count on that being the case.
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3. Housing/Mortgage Disaster
Dave: "I think any book written about the current housing/mortgage disaster should have a chapter dedicated to all the insiders who seemed to truly disbelieve it even when it was happening. A lot of bank and homebuilding insiders were loading up on stocks that had fallen from $40 to $20, only to see them go to $5. IndyMac insiders were buying big in Feb or March at $3-4, only to see the bank collapse in July."
4. Good Old Days
Dave: "Remember the gold old days when this crummy i-buy at TASR would be good for $300?" [RTIX, PWER, TUNE, ORCH, TASR…] – "the underlying principle here is that those [small $ amount] i-buys aren’t likely to signal anything, though we used to make $200+ on junk like that all the time. 
"Another change from the past: for many years, banks never worked. Now, they sometimes do because an i-buy can be a major positive sign at a bank in distress. But unfortunately, an amazing number of insiders have bet on banks whose situation then deteriorated badly. Some of these insiders just didn’t get it. Over the years we saw evidence that a lot of directors were out of the loop or just lied to, but even officers have been betting on some of these dud banks. The pros running real money know that officers know much more than directors do."
5. Key Principle
Dave: "One key principle that I’ve been failing to capitalize on for months now, there’s a major asymmetry in the way i-buy stocks move. Assume a quality i-buy where the stock still won’t move because the market’s weak. If you hold it and the market falls 1/2%, the i-buy stock will fall 1/2%. But if the market recovers and rises 1/2%, that i-buy stock may rise 1.5-2.%. I’ve seen this happen dozens of times. But I routinely dump stocks when they appear to just be tracking the market. I want stocks trading free of the market, like i-buy stocks used to. But the asymmetry stacks the deck in our favor. Traders who would otherwise be buying up an i-buy stock sit on the sidelines because the market stinks. But they keep watching it. When the market turns up, they pour into the i-buy stock, pushing it way ahead of the market."
Previous article on Insider Buying here.
