The Bill Gates Example: Insider Ownership as Success Indicator

Feb.14.08 | About: Microsoft Corporation (MSFT)

Generally the stocks I single out for investigation on this blog share many traits. In an ongoing series I outline the qualifications of these story-stocks.

When I invest in a particular stock, I'm really investing in the people employed by the corportation. While I do not know them generally, it's easy enough for me to find out certain things about them. The first thing I want to know is whether they believe in themselves. This, I can ascertain by investigating the level of insider ownership.

Insider ownership is represented by the percentage of outstanding shares in a public company owned by the directors, managers, officers, or others who have key 'insider' knowledge of the operations of said company.

In a general sense I'm looking for corporations whose insiders own at least 10% of the operation. This indicates that the interests of those in charge of the outfit will be compatible with those of the shareholders. Namely, both hold a significant financial interest in the performance of the stock.

It's not suprising that many of the wealthiest men in America, including the top dog Bill Gates, have achieved their enormous riches by partaking directly in the exponential growth of the world-changing enterprises they oversee.

If one owns 857,499,336 shares of Microsoft (NASDAQ:MSFT), then one is Bill Gates and he should be too busy to read this blog.

But, joking aside, it's clearly evident how Mr. Gates, and others in his position, benefit by appealing to investors (especially of the institutional variety) and taking actions that best serve the stock price over the long run.

Therefore I consider it a net positive for a company's insiders to hold a significant stake in the outfit. And when insiders purchase company stock on the open market, it's an even more bullish sign. For insiders may sell for any one of a million reasons, maybe their child is off to college or perhaps they're buying a new home. But insiders only buy for one reason: They think the stock, and very often with good reason, is going to go higher.

While not an ironclad rule, the stocks you'll see profiled on story-stocks generally possess a high percentage of ownership by insiders. It isn't a requirement per se, but it's absolutely a good rule of thumb.

Dislosure: I do not own shares in any of the companies mentioned.