You Have Inside Information… Do You Use It To Profit?

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Our plan was to publish another trading rule today.

The newest insider trading charges changed our mind.  We have fielded a number of questions from folks wondering why anyone would take the chance in light of the focus on this criminal endeavor at this point.  Why can’t they just play by the rules and let the superior information they get legally help them get great returns?

It’s simple really… or at least part of it is.  When you are a fundamental investor and negative information hits your stock, you have a decision to make.  Do you close the position or do you buy more?  In the case of hedge funds, there is even more ambiguity… do you close the trade and short the stock?  No such question exists for technical traders/chartists.  When price exceeds their pre-determined stop-loss level, they close the trade… period.

At any rate, the fundamental trader inside a high-powered hedge fund complex experiences the pressure to perform… on steroids.  The slightest misstep can lead to a loss of performance… a loss of money… a loss of face… a loss of employment.  In this article, CNBC Senior Editor John Carney gives you a glimpse at the why… the immense pressure felt by traders inside the world’s largest hedge funds.   Incidentally, this is also the reason that we trade price only and don’t worry about the “information”  for the most part.  All the information we need either is, or soon will be, in the price action.

Plus we never have to worry about “stepping over the line.”

Do yourself a favor… if ever you find yourself in possession of material, non-public information on a stock, trade something else.  Whatever money you could make is not worth the potential for a cellmate.

What would you do if you had inside information?  What if you weren’t sure it was inside info?  What if you “knew” there was no way for you to get caught?  Let us know what you think in the Comments.

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