When insiders buy their own stock

When people who work for a company buy their own stock, it’s worth noting. At the time of this writing, I’m looking at a company where the CEO owns a significant amount of his company. He’s been buying recently and has been buying steadily for years.

The steady buying by the CEO is good for a couple of reasons. One, it gives me conviction that my analysis on the prospects of the company going forward are correct. Two, it reinforces the likelihood the CEO will make decisions that favour shareholders because he himself owns a significant amount of shares.

The idea that CEO’s who own alot of their own stock are likely to make decisions that favour shareholders is illustrated well with Warren Buffett. Almost all of Buffett’s fortune is tied up in Berkshire-Hathaway. Looking at the Class A shares of which there are 1.5 million, Buffett owns just over 238,000 shares. At the time of this writing, one share is worth $417,528.

I don’t know the exact amount of his salary but I remember reading somewhere he pays himself about $100,000/year. That’s a modest sum for a CEO of a publicly traded company.

Part of the reason he pays himself so modestly is because his wealth is derived from his investment in Berkshire-Hathaway. He works for the shareholders of whom he is one. Anytime you see a company where the CEO doesn’t own alot of his own stock and pays himself millions of dollars in salary, be wary.

The company I’m looking at now the CEO owns about 5% worth. Not as much as Buffett but a healthy amount relative to what the typical CEO owns. He’s also been steadily buying more even as the price increases. A good sign. His salary is modest at about $600,000/year. Other CEO’s in his industry are paying themselves about $4-5 million/year.

Whenever you’re looking at investing in a company, it’s a good idea to see what the insiders are doing. When you find a company where the managers own a lot of the stock, pat yourself on the back, buy some shares because it’s not as common as you’d expect.