Another Reason Insiders are So Good to follow: Short-Swing Profit Rule

Warren Buffett is fond of saying something like view stock market investing as if you had a ticket punch with only the ability to have ten punches.  You’d think long and hard about what you bought before you put that hole in your ticket.    He also is noted to say that your third and fourth best ideas are not likely to be as good as your first best idea. 

When insiders buy stock in their companies they are subject to a very punishing rule known as  the Short-Swing Profit Rule.  What Does It Mean?   The Short Swing Rule is a Securities & Exchange Commission regulation that requires company insiders to return any profits made from the purchase and sale of company stock if both transactions occur within a six-month period. A company insider, as determined by the rule, is any officer, director or holder of more than 10% of the company’s shares.Investopedia SaysInvestopedia explains Short-Swing Profit Rule.  The rule was implemented to prevent insiders, who have greater access to material company information, from taking advantage of information for the purpose of making short-term profits. For example, if an officer buys 100 shares at $5 in January and sells these same shares in February for $6, he/she would have made a profit of $100. Because the shares were bought and sold within a six-month period, the officer would have to return the $100 to the company under the short-swing profit rule. 

Now think twice about that ticket punch.