Iron Capital Insights

  • Iron Capital Insights
  • June 12, 2014
  • Chuck Osborne

Insider Trading

Not much is happening in the markets worth writing about. No news is good news I suppose, but there is one bit of entertainment happening which may be a learning moment. As the golf world readies itself for the U.S. Open Championship one of the PGA Tour’s biggest stars, Phil Mickelson, is under investigation for insider trading.

The FBI and the SEC are looking into allegations that Mickelson got some hot stock tips from a Las Vegas gambler who had played poker with legendary investor Carl Icahn. Icahn supposedly told this gambler that he was about to invest in Clorox and the gambler passed it on to Mickelson. Who knows how this case will end? I am sure it sounds horrible to the layperson’s ears, and that was probably part of the point of making it public after more than two years of investigation had led nowhere. From my perspective the case sounds very suspect, but for our purposes that really doesn’t matter. As it turned out Icahn never gained control of Clorox, and to my knowledge he walked away.

Insider trading is not always everything it is cracked up to be. There are a lot of people out there who just can’t resist the idea that there is some short cut. There are others who are convinced that “it” (meaning pretty much everything) is all a conspiracy. “The system is rigged.” All you have to do is say it and “60 Minutes” will plug your book for you. Icahn and every other big-time investor just makes big bets based on hearsay and then flies out to Vegas to party like Leonardo DiCaprio’s character in “The Wolf of Wall Street,” giving tips to high-rollers who play golf with guys like Phil Mickelson. There is only one problem with this whole fantasy: it is a fantasy.

In real life the most successful investors are more like college professors than Vegas high-rollers. Most do not consider losing money a thrill, and they wouldn’t tell their own mother what their next trade is going to be. Also ironic is that the most successful investors are in no way “insiders.” Most notably Warren Buffett made his fortune in Omaha. Sure, everyone knows him now, but that was not the case when he was picking stocks out of the S&P register while sitting in his living room wearing pajamas. Sir John Templeton said his results improved when he left New York for Bermuda because he was less connected to the noise. Templeton wrote extensively about investing of course, but his favorite subject was actually theology – which is not all bad if your goal is to build a firm as successful as Franklin/Templeton, but probably a little too boring for Hollywood. In his book “More Than You Know,” Michael Mauboussin points out that most mutual fund managers who beat the market over time are not located in large financial cities, i.e. New York and Boston. In fact distance from those cities has a positive correlation with better investment results. One doesn’t need insider information to make good investment decisions, but if you really want some insider knowledge, don’t ask Carl Icahn, or anyone for that matter, what he is investing in next. Ask him how he thinks.

A few days before the Mickelson insider trading story broke I was playing golf with a friend who commented on Icahn’s very public investment in Apple. My friend knew that we had invested in Apple and knew that I had written an Insight about what Apple should do to boost the share price: Return more cash to shareholders and split the stock. He was evidently impressed that people like Icahn had made the same realization. I told him that it happens fairly often – we make an investment for our clients and a little while later it comes out that some big name hedge fund manager made a similar move at a similar time.

My favorite story happened in 2008 when we increased our allocation to U.S. stocks days before Warren Buffett published an op-ed in the New York Times telling people that he had done the same. That same year we invested in Goldman Sachs and a few days later Buffett made his large investment in Goldman. Later we were about to pull the trigger on a railroad when Buffett beat us to it. We joked that we should search our offices for bugs. It shouldn’t be that surprising. We have all read the same books and taken the same math, economics and finance classes. Investing really is not as mysterious as many wish to believe. Understanding value is simply a mindset, which can be trained. When one does so, he is then able to make his own decisions and draw his own conclusions, and he too will find that more famous investors will often be in agreement.

If you really want to get the inside scoop I guess you could fly to Vegas and play golf until someone hands you a hot tip from some famous investor. Or, you could just start thinking like a famous investor yourself. It takes a little more work and may not be as glamorous, but I believe you’ll find it is more rewarding in the long run.

Chuck Osborne, CFA
Managing Director