Insider selling refers to corporate managers, directors, and higher-ups selling their shares or stock options in their corporations.
Peter Lynch said, in effect, "There are many reasons insiders sell, but only one reason insiders buy." We kick off our expanded thinking on insider selling with this paraphrased reflection of Lynch's.
One of the more frequent postings across Fool.com in our discussion boards, blogs, and article comments is investors expressing anxiety, apprehension, or even anger at insider selling. In many cases, investors should first ask themselves this critical question:
What percentage of his or her holdings did this insider sell?
Few people take the time to investigate this prior to feeling troubled by insider selling, but The Motley Fool has consistently taught over time that -- in line with Lynch's line above -- if insiders are dispensing with less than 10 percent of their holdings, this is no big deal. In some cases, they're even exercising and selling stock options that would have expired shortly anyway.
In other cases -- and another good question to ask -- is how much wealth have insiders built up in their stock and is it not prudent, in such cases, to sell small portions systematically over time in order to diversify their assets? If you were an insider or company founder with 99% of your net worth tied up in your stock, would you not sell off at least little bits on a regular basis over time? Sure you would. And if you didn't think to do so, wouldn't any professional financial advisor helping you with your finances absolutely be advising you to do so? Of course. So in cases where successful entrepreneurs like Jeff Bezos of Amazon.com or Reed Hastings of Netflix have built up a lot of wealth in their single stock over time, you should definitely expect to see regular small selling from them. Which is exactly what you do see from those two and their ilk. And yet by no means do most Fools consider this a "danger signal" or something to get up in arms about or, in fact, something to pay much attention to at all. Again, if a really significant insider with a large holding sells 10%+ of his stock in one shot, then we will take some notice. Outside of that, though, both this activity and discussion-board postings often elicited by it are white noise.