INVESTING WITH MILLIONAIRE INSIDERSTri Star Equity Research

TRI STAR EQUITY RESEARCH

AGENDA

• Insider Qualifications and Motivations • Rules for Insider Buying • Methodology and Sample Characteristics• Results

– Overall– Based on Market Cap– Based on Insider Type– Based on Transaction Size

• UMI Study• Limitations• Conclusion & Questions

TRI STAR EQUITY RESEARCH

Insider Qualifications and Motivations

• SEC: “in a position to have privileged non-public material information on a publicly listed firm.”- Officer (CEO, CFO, COO, Board Members)- Director (VP)- 10% shareholder

• Motivation: create shareholder value• SELL reasons vs. BUY reasons

TRI STAR EQUITY RESEARCH

Rules for Insider Buying

• Insider trades based on material non-public info fraud (violation of fiduciary duty to shareholders)

• Section 16(b) of the Security

Exchange Act of 1934 – Form 4 reported SEC within 2 business days – Illegal to Buy & Sell within 6 months– To sell insider must own security

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Methodology

• Market: all stocks listed in USA (under SEC)

• Sample time frame: Oct 1 to Nov 30 2007

• Event: $1M + insider buy• Data source: Form 4 from j3sg.com

(3x day)

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Sample characteristics

10% Owners

47%

Officers 25%

Directors 28%

Small Cap 64%

Medium Cap 31%

Large Cap 5%• 204 transactions

• 4,4 transactions/day

Small 73%

Med 14%

Lrg 13%

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Risk Adjusted Returns

• Identifiy historical Betas

• R – β*Rm = α + ε

• Projected in 2 time frames:– 2 months after report– 4 months after report

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Results: Overall

  2 months 4 months

HPR 0,7% 5,6%

Annualized 4,1% 17,8%

STDEV 22,3% 24,1%

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Results: Insider Type

  Officer Director 10% SH

2 mo ER -2,8% 1,3% 2,2%

2 mo ER (an) -15,8% 8,2% 14,1%

2 mo STDV 20,8% 19,6% 24,6%

4 mo ER 4,1% 5,1% 7,9%

4 mo ER (an) 12,7% 16,2% 25,5%

4 mo STDV 30,3% 20,4% 24,1%

Outperform 2mo 39,1% 48,1% 41,6%

Outperform 4mo 52,2% 55,8% 53,9%

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Results: Market Cap

  SML MED LRG

2 mo ER 1,96% -1,42% -2,85%

2 mo ER (an) 12,37% -8,24% -15,94%

2 mo STDV 26,37% 12,04% 15,52%

4 mo ER 5,80% 6,49% -2,85%

4 mo ER (an) 18,44% 20,76% -8,32%

4 mo STDV 26,63% 19,18% 15,52%

Outperf. 2mo 40,8% 46,6% 44,4%

Outperf. 4mo 53,3% 55,2% 44,4%

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Results: Transaction Size  SML MED LRG

2 mo ER 0,2% 2,8% 1,1%

2 mo ER (an) 1,1% 17,8% 6,8%

2 mo STDV 22,7% 24,2% 18,3%

4 mo ER 5,0% 12,6% 1,2%

4 mo ER (an) 15,7% 42,9% 3,7%

4 mo STDV 24,3% 27,4% 17,7%

Outperform 2mo 43,1% 40,7% 41,7%

Outperform 4mo 56,2% 55,6% 37,5%

TRI STAR EQUITY RESEARCH

UMI Study (2003)

• Nejat Seyhun, professor of Finance at the University of Michigan – Time frame: 1975 to 1995– Historic (vs actual)– Sample random transactions– All sizes of transactions

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UMI Study: Results

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UMI Study: Results

TRI STAR EQUITY RESEARCH

UMI Study: Results

TRI STAR EQUITY RESEARCH

UMI Study: Results

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Limitations

• Relative short time frame to complete research = 2 month population

• Performance time period (2&4 mo)• Particular market conditions (bear)• Some outstanding firms less than 60

months old

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Conclusion

• Sample outperforms the market

• 10% SH > Directors > Officers

• MED cap > SML cap > LRG cap

- However Russ2k > SML cap

• Transactions: MED > SML > LRG

• UMI study confirms overall results

TRI STAR EQUITY RESEARCH

Questions