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As investors, we all work hard to gain an edge on Mr. Market. We look long and hard to find information that might not be known by anyone else and which will give us an edge in valuing a company. Today, with the internet making all kinds of information available to everyone, gaining such an edge is much harder than it was in the glory days of Warren Buffett in the 1950s.

There is one type of investor who will always have an edge on Mr. Market. And that type of investor is one who invests in shares of the company he/she works for. I can do hundreds of hours of research on a company, but there will always be pieces of information that an insider has that I don't.

And that is why I find it very difficult to not pay close attention to what the insiders of a company are doing with respect to their ownership positions. Are they buying? Are they selling? Surely, with the huge information edge that insiders have, their buying and selling has to be tremendously important in giving us outsiders an idea of how attractively valued a company is.

Yet, after years and years of watching insider behavior, I'm not sure that watching insider activity has helped me much if at all. What I've always envisioned as a perfect way for an insider to get rich is when the investment world is panicking. We have all seen share prices that drop to unimagineable lows on a rumor or market panic only to later return to a more normal valuation. I've always thought such a scenario would be ideal for an insider to get rich.

While the world panics about a specific company, an insider who is coming to work every day and seeing business as usual could step up and buy at the height of panic. As outsiders it is hard to step up and buy amidst swirling rumors or plummeting stock prices because we just can't be 100% certain there isn't something we don't know. An insider should be able to buy with conviction when everyone else loses their heads.

But insiders often don't take advantage of such opportunities. One instance that I can't shake from my memory is Stone Energy (SGY). In 2008 Stone was as high as $69 per share. In less than nine months the stock price dropped to $1.81 as the market panicked over everything, and especially over the debt Stone had taken on for an ill-timed 2008 acquisition.

I looked at Stone as it fell under $2, because I thought the concerns the market had were overblown. I considered buying, but didn't -- and I've missed out on making 15 times my money. Why did I pass on Stone? Because not a single insider bought a share at those depressed prices. I couldn't get past the idea that an insider wouldn't buy if he/she thought the company would be OK.

And that brings me to Cobalt International (CIE) which I wrote about a few weeks ago. Cobalt is drilling exploration wells in Deepwater looking for huge oil discoveries. If I could pick one person inside of Cobalt to talk to about those prospects, I'd likely pick the head of exploration. Since I likely can't talk to the Head of Exploration, the next best thing might be to watch whether he is buying or selling shares of Cobalt.

Here is the recent insider activity for Cobalt:

Insider

Title

Sold

Price

Amount

James Farnsworth

Chief Exploration Officer

80,000

13.44

$1,075,200

Van Whitfield

COO

56,588

15.51

$877,680

James Farnsworth

Chief Exploration Officer

320,000

14.92

$4,774,400

Total

$6,727,280

The Chief Exploration officer has sold almost $6 million in shares.

Today Cobalt provided an update on drilling from its Cameia-1 exploration target offshore West Africa. Given that the Chief Exploration Officer unloaded about $6 million worth of shares last month, you might expect some disappointing exploration results. But that is not the case. The main points from the Cobalt Presentation on Cameia-1 were:

  • The drilling results confirm the geologic model
  • The results were very encouraging
  • A significant column of high-quality volatile oil was recovered
  • Net pay estimates were better than expected
  • No oil/water contact was discovered

Cobalt has found what they were hoping to find, and perhaps more. The next step will be some flow test results.

The Cameia-1 prospect had potential for 1 billion barrels of oil in place. The recent drilling results have massively increased the likelihood that Cobalt has found something big. And a billion barrels is obviously very big. Had I been a shareholder, and sold based on the Chief Exploration Officer selling, I would have made the wrong decision.

Cobalt is going to have a lot of information coming out in 2012 as they are now fully into their exploration campaign that was slowed by the Gulf of Mexico slowdown. I personally don't own any shares because the company is virtually impossible to value. If I did own some I'd be tempted to sell a little if the share price continues upwards on this good news, although you may want to wait for the flow testing results which could be another positive catalyst.

Source: Mixed Signals From Cobalt's Exploration Campaign And Insider Activity