The Chef's table

A client recently asked me about CEOs who eat their own cooking. When they buy, does it signal good things to come?

Numerous studies of insider trading – that is the legal kind – show that when executives dine at their own restaurants (or all-you-can-eat-buffets), investors can usually expect positive results.

The first study into insider trading was published by James Lorie and Victor Niederhoffer (George Soros’ right hand man) in 1968. They show that under specific criteria, company insiders usually outperform the market for about six months following the date of a purchase. A later 1986 study by University of Michigan Professor Nejat Seyhun found that a company outperforms when as a group, a company’s insiders are purchasing more than they’re selling. A more recent 2003 study showed the most promise for investors. Harvard University’s Leslie Jeng and Richard Zeckhauser along with Yale University’s Andrew Metrick showed that insider purchases on average beat the market by about 6% per year. On the flip side, information about insider selling was not profitable.

Putting it all together, fund manager Peter Lynch said it best: “there are many reasons for corporate insiders to sell, but only one reason to buy.”

Of course there’s no guarantee that executives will do better every time. And investors should consider that insider behaviour only motivates short term results, and is not a long-term reason to buy.

Even so, I’d rather dine with the chef than without.

Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc offering investment management and planning for high net worth Canadians. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.