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In the book titled, The Little Book that 'Still' Beats the Market the author Joel Greenblatt has hinted at what is meant by an investing edge. In his words:
“Choosing individual stocks without any idea what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”
In the book titled, The Little Book that 'Still' Beats the Market the author Joel Greenblatt has hinted at what is meant by an investing edge. In his words:
“Choosing individual stocks without any idea what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”
What he meant was that individual investors need to have an investing edge, before they can commit capital to investing in the stock market. Among the many skills that are required to achieve success in the investing world, the primary skill is the ability to pick winning stocks consistently. There are many other skills that one does need, but if one were to single out just one, it is stock-picking. To be a good stock picker, one needs to have an Edge.
Broadly speaking, one can have an either an Informational Edge, an Analytical Edge or a Behavioural Edge. I'll just stick to the Informational Edge in this post, since we are talking about Insider Trading. As on date, it is illegal to trade on inside information and SEBI has done its bit in this regard.
Broadly speaking, one can have an either an Informational Edge, an Analytical Edge or a Behavioural Edge. I'll just stick to the Informational Edge in this post, since we are talking about Insider Trading. As on date, it is illegal to trade on inside information and SEBI has done its bit in this regard.
SEBI has issued guidelines for prohibition of Insider Trading in India and these have been formalised under the name: SEBI (Prohibition of Insider Trading) Regulations, 1992. SEBI does tend to update these regulations periodically. So, updates have been issued in 2015 and 2020.
From the investors viewpoint, and in plain English, the idea behind the regulation is that ‘connected persons’ who have ‘access to unpublished price sensitive information’, should not use such information to profiteer. So, such information has to be made public, before the connected persons can trade on it.
In the pre-Internet age, having information was considered to be an edge. Not anymore. Information is now freely available and disseminated in real-time. Nobody has an informational edge anymore; having information is not the ‘secret sauce’ it used to be - this is what the regulator wants us to believe. What if 'inside information' is still the secret sauce?
In a book called Black Edge written by Sheelah Kolhatkar, she actually gives a blow by blow and thrilling account of a real life insider trading story. She breaks up the informational edge in to three types. And in her words:
- Hedge funds are always trying to find what traders call “edge”—information that gives them an advantage over other investors. At a certain point, this quest for edge inevitably bumps up against, and then crosses, a line: advance knowledge of a company’s earnings, word that a chipmaker will get a takeover offer next week, an early look at drug trial results. This kind of information—proprietary, nonpublic, and certain to move markets—is known on Wall Street as “black edge,” and it’s the most valuable information of all. Trading on it is also usually illegal. When one trader was asked if he knew of any fund that didn’t traffic in inside information, he said: “No, they would never survive.” In this way, black edge is like doping in elite-level cycling or steroids in professional baseball. Once the top cyclists and home-run hitters started doing it, you either went along with them or you lost.
- There was “white edge,” which was obvious, readily available information that anyone could find in a research report or a public document, information that wasn’t worth much, frankly, but wasn’t going to get anyone in trouble.
- Then there was “grey edge,” which was trickier. Any analyst doing his job well would come across this sort of information all the time. For example, an investor-relations person at a company might say something like, “Yeah, things are trending a little lower than we thought….” Was that material nonpublic information?
In India, analysts regularly have closed door meetings with the company's that they wish to invest in. SEBI it seems allows this, as long as the fact that a meeting did take place is disclosed. So, a typical disclosure looks like this:
So, it says that the discussion was about Industry and Company specific developments already in public domain - the question is that if the developments were in the public domain, where was the need for a virtual call? The point is that, the contents of these meeting aren't made public. So, would it be safe to conclude that these selected analysts are in fact privy to material non-public information. And if that isn't a Grey Edge, I wonder what is? But the regulator seems to be totally 'OK' with this. How naïve can one be?