Bust The Tipsters! - Case # 6: The Insider Sale, By MF Parlay

Bust The Tipsters!

RULES & PRIZES | HEROES & VILLAINS | STANDINGS | ARCHIVE

Case # 6: The Insider Sale
By MF Parlay
Driving to work in the morning, Danny Gully was flipping through the AM dial looking for the traffic report. "Coming tonight. . . the final episode of Asteroid!" fuzz. . . beep. . . buzz . . . "Hey! Macarena!" fzzt. . . "More savings! No finance charge until May of". . . beurp. . . crackle. . . "fascinating little computer stock. It was worth millions to me, and to millions of other folks who listened to me."
It wasn't the words that made Danny stick on this station, it was the absolute clarity and authority of the voice that spoke them. The Talking Head was holding court.
The host blurted, "How about we take some calls here on K - Bucks, K B U X. Call 1-800-MO-MONEY to have our esteemed expert answer your questions. Caller, you are on the air with K - Bucks. Go ahead." A squirrelly voice came on, "Uh. . . hiya! Great show. Your last pick made me lots of money. What is your favorite stock to buy right now?"
The Talking Head wasted no time, "Sincerest thankfulness my dear caller. Actually, our favorite stock play is not a purchase at all. In fact, we are recommending you sell borrowed securities this particular period." Danny, still entranced with the voice, thought this might get interesting and continued to listen.
"We recommend you borrow and sell short shares of Microsurf <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SURF)") else Response.Write("(Nasdaq: SURF)") end if %>. Yes, they possess the superior internet and network software, but the stock fell through our negative-fluctuating-fiduciary-flange line yesterday. But that's not the worst of it. . . we just became aware last night that the president of the company sold one thousand shares of his personal stock."
Owning a couple dozen shares of Microsurf, Danny felt his blood pressure rise through the stratosphere. How could the president sell out? Not only did Danny spend all evening using Microsurf's new software, he had spent the past few nights reading how much money Microsurf was going to make selling their groundbreaking product. He went so far as to look at the company's financial statements and liked the positive numbers he saw. For crying out loud, he even had a copy of the software in his briefcase to show to his boss.
The Talking Head continued, "Use all the coded bits you want, we follow the actions of our friends at the top. If the president doesn't have enough faith in the organization to retain ownership of his shares, neither do we."
Microsurf's president, Bill Money, had started the business at age 12 and had built it into a billion-dollar monster. He was obviously no dim bulb. So why was he selling? The question troubled Danny. Not only that, Danny then began to realize that The Talking Head was in syndication. How many thousands of people had heard this message not only to sell, but to short his stock! Oh the humanity! Danny thought he better get on the line to sell his shares before the herd of raging short sellers knocked Microsurf into the dirt.
Stampeding up the escalators at work to get to the nearest phone, Danny didn't even realize that he was dropping papers in his wake. Racing behind him was a curious looking fellow in a low slung fedora. "Excuse me. You dropped these," said the man in the hat. Danny was speechless. "How do you do? My name is Fool, Motley Fool."
Danny replied, "Why thank you. . . but. . . I have to. . . uh . . . go. . . Bill Money, ya know, the Microsurf guy, just sold some shares. I heard it on the radio. I've got to go sell my shares, too."
The Fool considered the man's plight, and then Microsurf's "No need to panic," he said calmly.
Why shouldn't Danny panic?
1) It's good for Danny's character. The Talking Head's negative recommendation will cause the stock to drop; and you always learn the most from humbling experiences in the stock market..
2) The much-feared short sellers will eventually have to buy their shares back, thereby causing some "built in" buying power to the stock that might cause it to rise in the future.
3) The president will have to buy his shares back at some point in the future in order to retain his percentage ownership in the company.
4) Most top executives have a relatively small salary and receive massive numbers of stock options as their primary form of compensation. When they need cash, they sell.

And the answer is . . . 4
"You see," the Fool explained, "if Bill Money couldn't sell his stock he wouldn't have any way of financing that golf course he is building in his back yard. His salary barely pays for his food."
Many executives' primary source of compensation is through stock options. If the executives weren't able to sell their shares, they would have no way to turn their compensation into cash. Though massive "insider" sales can mean a company is in trouble, more times than not they mean nothing.
Furthermore, most stock options are given out on a rolling basis. This gives executives even more shares to hold. Many times an insider will retain the same number of shares because his sale will be offset by a recently received stock option.
The old Wall Street adage "Insider sales can mean anything" certainly holds true here.
This does not mean that The Talking Head's warning will not push the stock lower. Indeed, the power of his media reach is such that it might indeed happen. But the slide will most likely be temporary, the result of a fundamental misreading of a notoriously unreliable statistic.

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RULES & PRIZES \| HEROES & VILLAINS \| STANDINGS \| ARCHIVE
Case # 6: The Insider Sale By MF Parlay Driving to work in the morning, Danny Gully was flipping through the AM dial looking for the traffic report. "Coming tonight. . . the final episode of Asteroid!" fuzz. . . beep. . . buzz . . . "Hey! Macarena!" fzzt. . . "More savings! No finance charge until May of". . . beurp. . . crackle. . . "fascinating little computer stock. It was worth millions to me, and to millions of other folks who listened to me." It wasn't the words that made Danny stick on this station, it was the absolute clarity and authority of the voice that spoke them. The Talking Head was holding court. The host blurted, "How about we take some calls here on K - Bucks, K B U X. Call 1-800-MO-MONEY to have our esteemed expert answer your questions. Caller, you are on the air with K - Bucks. Go ahead." A squirrelly voice came on, "Uh. . . hiya! Great show. Your last pick made me lots of money. What is your favorite stock to buy right now?" The Talking Head wasted no time, "Sincerest thankfulness my dear caller. Actually, our favorite stock play is not a purchase at all. In fact, we are recommending you sell borrowed securities this particular period." Danny, still entranced with the voice, thought this might get interesting and continued to listen. "We recommend you borrow and sell short shares of Microsurf <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SURF)") else Response.Write("(Nasdaq: SURF)") end if %>. Yes, they possess the superior internet and network software, but the stock fell through our negative-fluctuating-fiduciary-flange line yesterday. But that's not the worst of it. . . we just became aware last night that the president of the company sold one thousand shares of his personal stock." Owning a couple dozen shares of Microsurf, Danny felt his blood pressure rise through the stratosphere. How could the president sell out? Not only did Danny spend all evening using Microsurf's new software, he had spent the past few nights reading how much money Microsurf was going to make selling their groundbreaking product. He went so far as to look at the company's financial statements and liked the positive numbers he saw. For crying out loud, he even had a copy of the software in his briefcase to show to his boss. The Talking Head continued, "Use all the coded bits you want, we follow the actions of our friends at the top. If the president doesn't have enough faith in the organization to retain ownership of his shares, neither do we." Microsurf's president, Bill Money, had started the business at age 12 and had built it into a billion-dollar monster. He was obviously no dim bulb. So why was he selling? The question troubled Danny. Not only that, Danny then began to realize that The Talking Head was in syndication. How many thousands of people had heard this message not only to sell, but to short his stock! Oh the humanity! Danny thought he better get on the line to sell his shares before the herd of raging short sellers knocked Microsurf into the dirt. Stampeding up the escalators at work to get to the nearest phone, Danny didn't even realize that he was dropping papers in his wake. Racing behind him was a curious looking fellow in a low slung fedora. "Excuse me. You dropped these," said the man in the hat. Danny was speechless. "How do you do? My name is Fool, Motley Fool." Danny replied, "Why thank you. . . but. . . I have to. . . uh . . . go. . . Bill Money, ya know, the Microsurf guy, just sold some shares. I heard it on the radio. I've got to go sell my shares, too." The Fool considered the man's plight, and then Microsurf's "No need to panic," he said calmly. Why shouldn't Danny panic? 1) It's good for Danny's character. The Talking Head's negative recommendation will cause the stock to drop; and you always learn the most from humbling experiences in the stock market.. 2) The much-feared short sellers will eventually have to buy their shares back, thereby causing some "built in" buying power to the stock that might cause it to rise in the future. 3) The president will have to buy his shares back at some point in the future in order to retain his percentage ownership in the company. 4) Most top executives have a relatively small salary and receive massive numbers of stock options as their primary form of compensation. When they need cash, they sell.
And the answer is . . . 4 "You see," the Fool explained, "if Bill Money couldn't sell his stock he wouldn't have any way of financing that golf course he is building in his back yard. His salary barely pays for his food." Many executives' primary source of compensation is through stock options. If the executives weren't able to sell their shares, they would have no way to turn their compensation into cash. Though massive "insider" sales can mean a company is in trouble, more times than not they mean nothing. Furthermore, most stock options are given out on a rolling basis. This gives executives even more shares to hold. Many times an insider will retain the same number of shares because his sale will be offset by a recently received stock option. The old Wall Street adage "Insider sales can mean anything" certainly holds true here. This does not mean that The Talking Head's warning will not push the stock lower. Indeed, the power of his media reach is such that it might indeed happen. But the slide will most likely be temporary, the result of a fundamental misreading of a notoriously unreliable statistic.