Hi Reader,

Welcome to the 4th edition of the Stockstartr newsletter. In today's edition, you'll learn why insider trading is a decent indicator of great returns, why losing money on an investment isn't shameful, and how to read the first page of an annual report.

Fundamental

Insider Buying

Imagine you analyze a stock. Everything looks good on paper: growing revenue & profits, sufficient cash flow, and increasing market share. The only downside is that the people leading the company (chief executive officer, chief financial officer, and board of directors) don't own any shares. You must wonder what is missing in the company. Do they not believe in their own leadership?

You want business leaders who put money where their mouth is. They are incentivized to perform well, as their success directly affects their own shares.

Insider buying is when company executives buy their own stock. It signals confidence and an opportunity for growth for investors. The CEO, CFO, and board of directors know what is going on within the company better than investors. When they are confident, so can you.

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Be aware and not blindly trust this signal of strength and confidence. A company in trouble knows this too. The CEO purchases a small amount of stock and can use it to lure investors to raise more money. Thus, treat insider buying with caution. Always consider how much they are buying in relation to their wealth.

Most company executives purchase a small amount of stocks when they get a function within the company. It is an unwritten rule to indicate to shareholders that they take the job seriously. However, the same executives get a salary and stock options as a bonus. So, instead of putting their own money on the line, they would rather receive money from the investors to get rewarded for their efforts.

The selling of shares is more common than the purchasing of shares by executives. Usually, a founder unloads shares, which goes gradually. But, most executives who get stock options sell these stocks on the market quickly. Thus, when an insider decides to sell, it doesn't necessarily mean that the company can expect a headwind.

How to find insider purchase and selling information? Paid and free tools exist to gather this data for you to filter through. Openinsider is a tool (free) that follows all transactions related to American public companies. Most transactions are exercising of stock options. Insiderscreener is a paid tool that allows you to find insider trading in 12 countries, including Germany, Sweden, and India.

Searcing for insider buying is a practical filter for companies to analyze. When the business leaders buy extra shares, they expect to get out of a slump or have a new product in the pipeline.

Glossary

Preferred Stock

There are 2 types of stock: common stock and preferred stock. The preferred shares have characteristics of both bonds and common stock due to the claim on dividends and price movements but are limited to no voting power. Many different types of preferred stock exist. The details of each issue are found in a prospectus.

Practical

The annual report's Title Sheet

In last week's edition, we showed how to obtain the annual report. We now discuss the title sheet, which is the very first page of the report. It provides us with much information, such as the type of report, official company name, jurisdiction, headquarters contact, and outstanding shares.

At the very top of the sheet, the financial authorities are stated. Directly below in box 1, it notifies the reader what form it is. In this case, the 10-Q is for quarterly and the 10-K is for annual reports. In the example, the quarter ended September 30, 2024.

Box 2 shows that the company is "The Charles Schwab Corporation," many know as just Charles Schwab. The company is incorporated in the state of Delaware (box 3), where most public companies register. The state is business-friendly due to the tax law and a special court handling corporate cases.

Interestingly, the headquarters, in box 4, is in Texas. The headquarters state is often different from the state of incorporation, just like here.

The financial authorities oblige the company to disclose which securities are outstanding. In the case of Schwab, there are 3 securities: 1 common stock and 2 preferred stock. The preferred have dividends of 5.95% and 4.45%. They are non-cumulative, which means that the 'missed' dividend one year won't be carried over to future payouts.

At the bottom (box 6), the company discloses the shares outstanding on the record date. There are 1.7B common stock shares and 50.8mln nonvoting common shares outstanding on October 31, 2024. The outstanding shares figure helps you further in your analysis of income and cash flows.

Principle

Losing Money from an Investment is a Learning Opportunity

Losing money on the stock market happened to everyone at least once. You may find it hard to admit. However, it isn't shameful to lose money on an investment. After all, it is all about allocating money towards investments with a high probability of positive returns. This means that not all investments are winners.

Closing an investment is, for many investors, not easy. Most of us hope that the price goes back up. It can happen, but just as likely it won't.

The key here is fundamentals. Are the fundamentals improving or deteriorating? When it is the latter, it is better not to hold on to the position. And definitely don't buy more.

If the opposite happens, where the stock goes down, and the fundamentals improve, then it provides a great opportunity to increase your position.

When you lose money investing, acknowledge it. Speak it out loud: "I lost money in investment XYZ." The following step is analyzing what went wrong:

• Did you overlook something in your analysis?
• Did an event happen outside the control of the company?
• Did the regulations change?

Finding answers to the above questions prepares you better for your next investment. You grow from losing money as you learn from the event. In addition, you see it as a learning opportunity rather than a failed attempt at wealth generation.

Many inexperienced investors in this situation feel a strong urge to make up for the lost money quickly. They lack discipline and resort to gambling on the stock market 'to win their money back .'Rash decisions to invest in a 'sure' thing will fail sooner or later. Divert your focus to a new analysis instead.

Thanks for reading Stockstartr. For questions, suggestions, or feedback, please reply to this email. We will gladly take the time to listen to you. Please ask your friends and colleagues to sign up.

No investing advice is given at any moment. The newsletter is purely for informative purposes only.​
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