Why you should monitor boardroom trading

Enron is an extreme example of why it's important to monitor boardroom trades.

In this scandal, Enron faked their accounting, misleading investors. However, top management knew exactly what they were doing. They sold their stock even as they encouraged employees and the public to buy more stock, knowing the clock was ticking, and the truth would eventually come out.

Richard A. Oppel Jr. and Alex Berenson wrote in the New York Times, "Since May 2000, Mr. Skilling (the CEO) has sold at least 450,000 Enron shares worth at least $33 million, according to Securities and Exchange Commission filings." - August 15, 2001. [1]

Short seller James Chanos noticed Enron's finances were in bad shape, and that executives were selling their stock:

"Another disturbing factor in our review of Enron’s situation was what we perceived to be the large amount of insider selling of Enron stock by Enron’s senior executives. While not damning by itself, such selling in conjunction with our other financial concerns added to our conviction." [2]

He traded accordingly, and ended up not only side-stepping the whole disaster, but making a profit.

This is why ultimatestockpicker.com focuses on fundamental company performance as well as boardroom trading.

This does not mean that large amounts of boardroom selling indicates wrongdoing - the insiders could simply be cashing in on their success, or diversifying. But it's always worth remembering that top management know more about their company than any analyst or investor.