Academic Finance have for years been propagating the general idea that Inside Information, though illegal and unethical, could bring in big money on Wall Street and in investing in general. If you happen to know something that others do not (that something is happening to company X that is going to increase shareholder equity thus moving up the stock price), then you will be cashing in on the great move. How valid is this idea? And what do the successful investors out there have to say on it?
Jim Rogers used to famously say that investing on insider information is the fastest way to the poor house and it should not be practiced because it is unethical.
But here is what legendary speculator of the 1920s and 1930s, Jesse Livermore has to say in his book ‘How To Trade In Stocks’ :
“… Now and then someone begins trading because he has a hot inside tip from a friend in the inner councils of a large corporation. Let me here relate a hypothetical case:
You meet your corporation friend at luncheon or at a dinner party. You talk general business for a time. Then you ask him about Great Shakes Corporation. Well, business is fine. It is just turning the corner and the future outlook is brilliant. Yes, the stock is attractive at this time. “A very good buy, indeed,” he will say and perhaps in all sincerity. “Our earnings are going to be excellent, in fact better than for a number of years past. Of course you recall, Jim, what the stock sold for the last time we had a boom.”
You are enthused and lose little time in acquiring shares.
Each statement shows better business than during the last quarter. Extra dividends are declared. The stock moves up and up. And you drift into pleasant paper profit dreams. But in the course of time the company’s business begins slipping dreadfully. You are not appraised of the fact. You only know the price of the stock has tobogganed. You hasten to call your friend.
“Yes,” he will say, “the stock has had quite a break. But it seems to be only temporary. Volume of business is down somewhat. Having learned the fact that the bears are attacking the stock. It’s mostly short selling.”
He may follow along with a lot of other platitudes, concealing the true reason. For he and his associates doubtless own a lot of stock and have been selling as much and as rapidly as the market would take it since those first definite signs of a serious slump in their business appeared. To tell you the truth would simply invite your competition and perhaps the competition of your mutual friends in his selling campaign. It becomes almost a case of self-preservation.
So it is plain to see why your friend, the industrialist on the inside, can easily tell you when to buy. But he cannot and will not tell you when to sell. That would be equivalent almost to treason to his associates.
I urge you always to keep a little notebook with you. Jot down interesting market information: thoughts that may be helpful in the future; ideas that may be re-read from time to time; little personal observations you have made on price movements. On the first page of this little book I suggest you write – no, better yet print it in ink: “BEWARE OF INSIDE INFORMATION…ALL INSIDE INFORMATION!”
It cannot be said too often that in speculation and investment, success comes only to those who work for it. No one is going to hand you a lot of easy money. It is like the story of the penniless tramp. His hunger gave him the audacity to enter a restaurant and order ‘a big, luscious, thick, juicy steak,” and, he added to the old waiter, “tell your boss to make it snappy.” In a moment the waiter ambled back and whined: “De boss say if he had dat steak here he’d eat it himself.” And if there was easy money lying around, no one would be forcing it into your pocket.”