There’s a folk belief on Wall Street that when an insider buys their own stock, you should probably buy it too. The logic is sound: a CEO knows everything about their company, so if the CEO’s backing up the truck, you back up the truck too.
Jeff Green is the CEO of The Trade Desk, which is a software marketing automation company now worth about $6 billion. Green went out and bought about $148 million of his own company’s stock. Six million shares, then around $24.68 each, in the open market. Then he wrote a blog post about it.
The post was called “Why I spent $150M on my own company???” (Those are his question marks. I would not have used three.)
The gist was that Wall Street was being dumb about his software company. Everybody had decided that “software is dead.” Claude and the other AI tools were about to let some kid rebuild Salesforce or The Trade Desk over a long weekend. So Green put his money where his mouth was and bought a giant pile of shares in public.
And it worked, for about a day. The stock jumped 18% when the filing came out.
Then earnings started happening. In May, revenue grew 12%, but the stock dropped 15%. Why? Well on Wall Street growing only 12% is a catastrophe if your CEO just dropped $150 million and everyone expected you to grow faster.
Last week, it it happened again. Q2 revenue came in at $715 million when Wall Street expected $751 million. The stock fell another 23%, to about $13.80. The company said something like: ‘customers are reevaluating their spend,’ which is a very gentle way to say your customers are leaving.
Today, TTD 0.00%↑ is trading at $13.06, and Green is down about $75 million.
Ok back to the insider buying
Whether insiders actually know something has been studied to death for 40 years, and the answer is more boring than you think. The famous paper is Lakonishok and Lee, 2001, which ran almost every insider trade on US exchanges over twenty years through a computer.
They found insider trades were only weakly predictive of broad market movements, with almost all of the winners concentrated in small, ignored companies (the ones where the insider genuinely knows things the market hasn’t bothered to price).
For big, highly public stocks the edge is also small. A later paper, Jeng, Metrick and Zeckhauser suggested insider buys can beat the market by about 6%. Top executives do no better than other company insiders. The CEO’s giant conviction buy is worth, statistically, about as much as a mid level manager topping up their retirement account.
Anyways, I don’t write this to dunk on Green. CEO’s putting their own money behind their companies is incredibly important.
Maybe the lesson here is not that insider buying is meaningless. It’s just that an insider buying is evidence that the insider thinks the stock is cheap, which is a slightly less useful events than people make it out to be.
Jeff Green knew The Trade Desk better than anyone. He knew the customers. He knew the product. He knew the pipeline. And with all of that information, he looked at the stock at $24.68 and said: yes, I would like $150 million of this at $24.68 per share.
It is now $13.
Which does suggest one potentially useful tip for following insider buys:
Filter out any purchase accompanied by a blog post with three question marks.