Should investors be worried about what effect insider selling might have on the value of their ASX shares?
If you own shares in a company, surely the notion of one of this company's senior management figures selling off large stakes of their own equity would raise a red flag? If this does happen, wouldn't it be prudent for you as an ordinary, retail investor to follow management and jump ship?
Well, I don't think it's that simple.
What is 'insider selling'?
Not to be confused with 'insider trading', insider selling refers to when a member of a company's management team or board of directors sells shares in the company. By law, these sales (as well as any buy orders) have to be reported to the market. This provides us with the opportunity to scrutinise whether a company's leaders are 'putting their money where their mouths are', so to speak.
We saw this in action just yesterday. Former ASX tech high-flyer WiseTech Global Ltd (ASX: WTC) informed the market (before open) that its founder and CEO, Richard White, has sold 2,445,653 shares of his own company at a market value of approximately $45.9 million. These sales apparently occurred between 22 June and 29 June. WiseTech shares understandably dipped more than 2% yesterday on the news.
Is insider selling really a bad thing?
When I consider this question, I always try to place the situation in context. Every person worth their salt when it comes to prudent, wealth-building practices knows that keeping your investments diversified across different assets and asset classes is usually a good idea. If I was in Mr White's position (the WiseTech CEO, not the Breaking Bad character!), I wouldn't want 90% or more of my wealth tied up in a single company. This is regardless of how much faith I had in the company's future. Looking at Mr White's remaining holdings in WiseTech, we can see that he still holds around 151 million shares. This means that the selling announced yesterday represented a mere 1.62% of his total holdings.
Insider selling is actually very common among founder-led companies. Many famous founder/CEOs from around the world have sold off shares of 'their' companies over the years. They include Microsoft's Bill Gates, Facebook's Mark Zuckerberg, Amazon's Jeff Bezos and Alphabet's Sergey Brin and Larry Page. This is usually done to diversify wealth or to fund other ventures. Then again, some other founder/CEOs, like Berkshire Hathaway's Warren Buffett or Tesla's Elon Musk, have been reluctant to part with their shares for most of their lives.
Foolish takeaway
When it comes to insider selling, generally I don't feel too alarmed. If it looks as though management are 'fire-saling' their stock, or inexplicably selling off vast chunks of shares for no reason, it might be a different story. But I do feel the media likes to beat up those people like Mr White who might just want to take some profits off the table after years of investing in their companies. Personally, the latter doesn't bother me, we're all human after all.
