Law is law - Legal insider trading

I’m very undereducated in terms of history and for my generation, we really did not learn much useful regarding history anyway at school. You can even call it all rubbish education.  By the way, my son is really good at history though, even much better than I’m for the Chinese history although he did not attend one day school in China. Shame on me! 😝 So I rarely talk about history here. But I’m reading a lot these days and I just ran into something interesting. So thought to share with you about this historical information related to investing.

I’m sure everyone knows the famous JFK, right? But do you know anything about this father, especially that he was very rich? Any idea how he became so rich? I bet you don’t know. So let me share with you the history of his fortunate making. The information below is from a source I just read and not my own writing at all:

And it may surprise many readers to learn this, but JFK’s dear old dad actually built the family fortune from insider trading.

In 1919, Joe Kennedy joined the brokerage firm Hayden, Stone & Co. and quickly became an expert in the then-unregulated stock market. He got rich using tactics that are now considered insider trading and market manipulation.

Among other things, he bribed reporters to spread false stories in an information-starved age to drive prices up for his investment pool. He also participated in organized “bear raids” to crush stock prices. A bear raid is when a group of short sellers collude to sell a stock, smear the company, and then profit when the share price falls.

And legend has it that in 1929, Kennedy got out of the crazed, speculation-fueled market when he got a stock tip from a shoeshine boy. He then heavily shorted the market before the Great Depression and made a $4 million fortune [about $60 million today].

He used that fortune to invest in real estate, multiplying his wealth even more. His net worth grew to $180 million—which is about $3.4 billion today.

You’d think he would’ve been punished for all this… Instead, he was rewarded. How so?

As if all that wealth from his insider trading wasn’t enough, President Franklin D. Roosevelt appointed Joe Kennedy to the newly created Securities and Exchange Commission [SEC] in 1934. Not long after, Kennedy was named the SEC’s first chairman.

When asked why he did it, FDR supposedly said, “It takes a thief to catch a thief.”

Kennedy then went on to outlaw the very practices that made him rich.

Pretty interesting and very hypocritical, right? You may think I’m going to criticize him for his real inside trading, which has put a lot of people in jail nowadays. Actually I must say he was a very legally compliant guy per the law at his time and good for him to use the legal loophole to make his fortunate. Indeed, by today’s standards, his action was quite disgusting, immoral, and definitely illegal! Similar kind of behavior by the Tesla genius Musk has cost him $20 million and the board chair position recently. But I must say, law is law. Back then, there was no law prohibiting such kind of inside trading and he did have the right to do what he was doing for making his fortunate. Why should anyone complain about it? That’s why I found quite funny these day, seeing people constantly complaining that Trump has not paid enough tax proportionate to his wealth. Unless he has done anything illegal by invading taxes, which is not you and me can judge about, what's wrong if he has done everything possible by minimizing his tax via legally allowed loopholes or whatever you may call it? Just ask yourself if you are also doing exactly the same thing in your annual tax filing? Don’t tell me you are not; then you must be a blockhead or a big liar! I’m certainly trying my best to do so and I have nothing to feel shamed about!! Then I also keep seeing people criticizing him being bankrupted several times in the past and considering it immoral. Again, for any business owner, his top priority and obligation are to protect the shareholders’ interest as much as possible within the legal framework. When a business is indeed in big trouble, bankruptcy via Chapter 11 is often an effective way to potentially save the business and may allow it to revive. There is nothing illegal here and I don’t see anything immoral as well per the current business standards. If anyone insisting so, then I have to say he or she is just a total ignoramus and don’t know what they are talking about, period!  

I have digressed a bit I know and now back to the topic of insider trading. It is now totally illegal and no one should ever try. Having said that, there is a way to do something similar to “insider trading” but legally! How so? Just Follow the lead of insider buying. Now let me ask you, do you trust insiders like CEO, CFO or board directors of a company or rather trust more analysts who are often clueless, when talking about the business prospects? I don’t know you but I’m certainly going with the former. What do you think about their business when these kind of very top managers are aggressively buying their own stocks? As the Street cliché goes, insiders can sell for various reasons nothing to do with their business, but there is only one reason for them to buy: betting higher stock prices when they feel the business is doing well and the stock price is at discount. You may ask how they can buy without violating the law? Well, there are certain blackout periods when it is taboo for them to buy or sell, e.g. around the time of earnings report or a major submission or approval (for biotech), etc. But they are free to buy or sell when there is no such kind of conflict of interest. Remember two years ago the JPM CEO, Dimon, famously publically announced his buying of $20 million worth of the JP stock? Looking back, it marked the exact bottom of the stock and since then it has jumped 40%. So if you can follow their footstep to also buy when they are aggressively buying, the chance is high that you may be doing well more often than not. Of course most of such insider buying won’t be publically announced like Dimon did. However there is a way to look into it. By law, insider trading by senior management must do Form 4 filings filed with the U.S. Securities and Exchange Commission (SEC) within days. And this information is available to the public. Of course it is easier said than done to look into such kind of information and it is not for everyone for sure to be able to correctly locate and appropriately digest the information. But if you happen to be able to follow the lead of insider buying, don’t waste it. Give you one example. From my source, I learnt that recently the famous discount broker,  E-Trade (ETFC) Executive Chairman Rodger Lawson, Chief Financial Officer Michael Pizzi and Director Joshua Weinreich all have aggressively accumulating their own stocks recently. While significant buying from the top insiders like CEO/CFO does not necessarily mean it is always the best timing to buy the stock, at least it is a demonstration that those who really know the business are considering the current valuation of the stock is great and they expect the stock price will further grow from here. In other words, while there is no guarantee the price they have paid is the lowest or the stock price won’t further go down, most often than not, the stock price will go up as a long term trend from the time they bought.  So if you like the idea, do your own homework and decide if it is a right one for you. I just hope my writing here will provide some food for thought for you, an idea where you may find some good values in this volatile market.