Introduction: Decoding the Mystery of the Public Room

      “An investment in knowledge pays the best interest.”

      — Benjamin Franklin

      In the middle of Washington, DC, a moderately tall building holds one of the best known sources of financial information. With this information, anyone with a brokerage account has the tools he or she needs to handily beat the market year after year.

      Yes, it’s a government building, but it’s not the US Treasury — they don’t even handle money in there. That’s the responsibility the Bureau of Engraving and Printing, which could hardly be confused with the building to which I’m referring. Nor is this could this building be confused with the Federal Reserve building. The Fed is slowly becoming more public about its monetary policy, but it’s still not as transparent as this particular agency.

      This building is at 100 F Street, NE, right by Union Station, just north of the Capitol Building. Flagpoles stand formidably outside the entrance, as do security guards.

      It even has a room set aside for the public. Naturally, the government named it the Public Room.

      While most of the building is off-limits to anyone not strictly working for the government or on government business, you can find (or if necessary, request) within this room whatever information you need. Why? Because this agency exists to acquire and disseminate this information to anyone with an interest in learning it.

      The information available from this government agency is vast. In an average year, its data reporting is increased by over 270,000 forms. In a country with a population of more than 315 million, that may not seem like a lot. But it is staggering when you consider that only 15,000 organizations are required to file information here.

      Yes, some of the information this agency receives is held back from the public. But what’s astonishing is how much of the data collected is available to anyone who walks in . . . free of charge.

      The government agency is the US Securities and Exchange Commission (SEC), and the data collected and disseminated is based on insider trades. This includes purchases, sales, and simple disclosures of ownership.

      Chances are you’ve heard that investing alongside insiders can help boost your returns. In this guide, we’ll look at insider trades. Specifically, we’ll find out how buying shares alongside high-level executives, board of director members, and major shareholders (those with a 10 percent or larger stake) can give you higher returns than the market.

      Most investors and fund managers can’t even beat the market year over year. They chase stocks that have performed well right before those stocks crash. Yet corporate insiders have a consistent track record of trouncing the market. That’s why this information is so powerful — provided you know how to decode it.

      Before we delve into the details, here are the key takeaways on insider trading:

      These insider trades are legal. (We’ll look at the specific differences between a legal and an illegal insider trading in Chapter 3.) The entire point of creating the SEC was to ensure that the public received materially important information on a company as soon as its officers, directors, and major shareholders did. Hence the strict reporting requirements for every trade — even a trade as small as buying or selling one share!

      These insider trades beat the market average consistently. On average, a portfolio of stocks based on insider buying will beat the market by 6 percentage points per year. Of course, if you know how to read the data, you could avoid some of the insider buys that go awry — and do even better than those “in the know” execs! Imagine making 20 percent from a stock in only three months; or making 42 percent gains buying a stock before it realizes record-smashing earnings; or even using some of the more advanced strategies in this guide, making triple-digit gains while putting far less capital at risk.

      These insider trades are easy to follow . . . and getting easier every year. For decades, professional investors have had an information advantage. They’ve been able to get this data faster than mom-and-pop investors. This information edge has enabled them to achieve even better returns by getting into trades alongside insiders more quickly. But that’s changing. Today, regular investors can get the information faster and cheaper than ever before. This narrowing advantage between professionals and insiders isn’t completely gone yet, but it’s getting there.

      But there’s a catch. And it’s a big one. This information is public . . . but it’s encoded. To understand this information and how to profit from it, the data must first be interpreted. What’s more, once you have decoded it, you need to know how to apply it to your brokerage account to get the full financial benefit that it offers.

      Between the layers of government forms and Wall Street lingo, that can be a tough prospect. But it’s not impossible. In this guide, we’ll decode the secrets of the public room, find a way to access the information without taking regular trips to Washington, DC, and even look beyond this information to better improve investment returns.

      I’ve divided this book into two sections. In the first, we’ll look at the hard data behind insider trading: how (and why) it outperforms the market indexes, and how you can narrow that data down to the profitable essentials. In part two, I’ll show you how