Insider Trading Patterns Give You the House Advantage

Insiders include company executives, board members or large shareholders. No one knows more about the operations of a company than these people.

We were in Las Vegas last week for our annual conference.

What an amazing event! Thank you to those who attended, either live or online.

Las Vegas is a unique place with things I don’t see in my normal life.

For example, I developed a theory as I watched people in the casino at the Mandalay Bay resort. The house advantage in the casino is similar to the advantage of a company insider who buys shares in his or her company.

Insiders include company executives, board members or large owners of company’s stock. No one knows more about the operations of a company than these people.

This can help us earn 25% over the next year.

Let’s start with some background…

Are These Games Rigged?

In the casino table game Blackjack, the house only has a 0.28% edge against a person who plays every hand “by the book.” That is, the person who hits or stays in exact accordance with the odds.

That means blackjack is one of the more even of the games at a casino.

By comparison, Caribbean stud poker is a table game with rules like five-card stud poker. “Stud” means you make your hand with only the five cards dealt to you.

Per the site WizardOfOdds.com, the casino’s edge on this game is more than 5%. So, the casino retains at least $5 of every $100 bet, on average.

Now, the site mentions the exact edge may be a bit different than this depending on how a person normally bets, but the point is clear.

On average, the house wins.

The Parallels to Investing

As I mentioned above, in investing, company insiders have the closest thing to a house advantage.

Think about it…

The house has all the information about a given game. After all, it makes the rules … or at least dictates how to play the game at its establishment.

In investing, who knows the most about the goings-on at a particular company?

The insiders.

This group of people knows more about the activities of a business than anyone else.

No one lives and breathes a business and every facet of it more than management. And management has access to the smarts and battle scars of the board of directors.

Most board members have decades of experience and have seen a wide variety of situations.

If a stock sells off for some reason, they can advise management on how to address it.

Many of them have been in this situation before. They can often predict how it will play out.

If there is an operational issue, they can help management take the appropriate steps to address it, maintain or recover market share, and move forward.

How to Use This Theory to Your Advantage

One way you can gain the house edge is to bet with it.

The VanEck Vectors Gaming ETF (NYSE: BJK) does exactly that.

This exchange-traded fund (ETF) owns stakes in 43 gaming-related investments. These stocks have or help casinos have the house advantage. They own casinos, make equipment or provide gaming services.

And five of the top six holdings in the BJK ETF have operations in Macau.

The south China island of Macau is the world’s largest gambling market. It is even bigger than Las Vegas.

In 2017, gaming revenue totaled $33 billion there … compared to about $10 billion in Las Vegas’ Clark County.

However, the U.S.-China trade tensions have weighed on the prices of these names. Shares of BJK are down 13% year-to-date.

As U.S.-China relations improve, however, this ETF will, too.

And there’s another reason to be optimistic. We are seeing insider buying at the two largest holdings in the ETF.

Las Vegas Sands Corp. (NYSE: LVS) and Galaxy Entertainment Group Ltd. (OTC: GXYEF) make up nearly 15% of the assets of BJK.

Like the house, insiders are well-situated to profit. The executives at these companies are giving us a reason to be bullish on BJK.

If you buy BJK today while it’s cheap, you’ll be up 25% or more by this time next year.

Good investing,

Brian Christopher

Senior Analyst, Banyan Hill Publishing

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