Buy When Everyone Is Selling

Buying when everyone else is selling is easier said than done, but there's one group of investors who charge in to buy when stocks are selling off: the corporate insiders. How do they do it?

This article was originally published by Zacks.com.

"Buy when everyone is selling."

How many times have you heard that as stocks are plunging? I don't know about you, but it's easier said than done.

But there's one group of investors who charge in to buy when stocks are selling off: the corporate insiders.

How do they do it?

They have 2 key advantages over you and I that provide them the edge during uncertain times. If you follow their lead, you can have that edge too.

Key Advantage 1: Insiders have information

Everyone knows that information is power, and who knows more than those actually running the company?

The corporate insiders—the CEO, CFO, General Counsels, and even the Head of Human Resources—know who is getting hired or fired. They know if last month was a record month for sales and if a new factory is opening in China, all before it has been announced publicly.

Even better, they can actually purchase their company's stock, knowing all this information, and it's perfectly legal.

When corporate insiders get excited about their company's prospects, you should, too.

Key Advantage 2: Insiders know when to buy

Insiders don't buy their own shares willy-nilly. As a stock rallies, insiders are likely to stay on the sidelines, because their stock is no longer cheap.

Insiders like bargains just like the rest of us.

That's why during this recent bull market over the last 16 months, the number of insider buying has fallen compared to the selling. Just like you, the insider doesn't want to buy an overpriced stock.

But when the company stock sells off, especially in a short period of time, the insider sees it as an opportunity. The insiders want a deal.

This is what happened in August 2011 when the S&P 500 plunged from its April high. In the first 9 days of August, 919 insiders at more than 100 different companies jumped in to buy their companies' shares. It was the largest amount of insider buying since the market bottom in March 2009.

Were they right?

Just 6 months later, the S&P 500 had rebounded over 15%. Stocks never looked back from that sell off and the S&P has gone on to make dozens of new record highs since then.

And the insiders cashed in.

Are the insiders about to jump in again?

The NASDAQ is down nearly 10% from its recent highs, which is the largest pullback in the NASDAQ in 3 years.

And some individual stocks have seen an even more significant pullback. Within the NASDAQ 100, 29 of the 100 companies have seen their share prices fall more than 20% from their highs.

As we've seen, the insiders like to buy when there are dramatic sell offs. When everyone else is selling, they see a bargain. Remember, they have knowledge of what is going on inside the company, so they are more optimistic than the rest of us.

Just like in 2011, this year is turning out to be an opportunity for insiders.

I'm expecting to see a deluge of insider buying. They love their deals and there haven't been many chances like this in the last few years.

Are you ready to follow their lead?

Tracey Ryniec is Zacks' Value Stock Strategist and serves as editor in charge of the Value Investor. You can follow her on twitter at @TraceyRyniec.

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.