Editor's note: This story was originally written going into 2023 and has been added to our CNBC Investing Club white paper vault. This is the kind of in-depth reporting on the markets that Club members can expect. For the first time in nearly two decades running JPMorgan Chase, CEO Jamie Dimon will voluntarily sell stock in the bank. The disclosure, in a securities filing Friday, detailed next year's planned sales— pressuring JPMorgan (JPM) shares and the Dow Jones Industrial Average and highlighting why tracking trades made by executives involving the companies they lead should be an important part of every investor's homework. Dimon is setting up the trades through a predetermined plan that executives at publicly traded companies use to protect against insider trading accusations. It will mark the first time that the 67-year-old CEO has offloaded shares of JPMorgan for nontechnical reasons, such as exercising options. The planned sales — amounting to roughly 12% of the JPMorgan stock owned by Dimon and his family — are being done for tax planning and personal wealth diversification reasons, the bank said. Both are common reasons for executives to sell stock in their firms. The bank also said Dimon continues to believe JPMorgan's prospects are "very strong," and his planned trades are not related in any way to succession. Such sales are often seen when CEOs get close to retirement. As you can see, making sense of insider transactions can sometimes be a tall task. When they buy, it's generally seen as an encouraging sign by Wall Street — and there is, perhaps, no better example of this than another move by Dimon in 2016, when he purchased JPMorgan stock. Fears of a weakening global economy sent stocks into a tailspin in early 2016, driving shares of JPMorgan down nearly 20% and the S & P 500 down more than 10% at their lows. But that weakness didn't last long. The trajectory of the market changed just six weeks into the new year. That's when Dimon disclosed —after the closing bell on Feb. 11, 2016 —that he bought 500,000 shares of the bank, worth about $26 million at the time. Dimon's stock purchase , intended to show confidence in the financial sector, has become legendary on Wall Street. It ultimately coincided with —or perhaps was the reason for —the closing lows for not only shares of JPMorgan in 2016 but also the S & P 500 overall. Jim Cramer has since dubbed Feb. 11, 2016: "The Jamie Dimon Bottom. " JPMorgan finished up 30% that year, while the S & P 500 ended more than 9% higher —both huge turnarounds. While executive stock sales —such as Dimon's planned transactions next year —are not universally red flags, they can get complicated. Case in point: Moderna (MRNA) and Pfizer (PFE) executives made a series of sales during the Covid-19 pandemic, as their companies worked to develop a vaccine for the virus. The rebuke in the court of public opinion and on Capitol Hill was sharp. Despite executing the sales through the same kind of predetermined plan that Dimon will use, the executives nevertheless faced criticism around the appearance of the sales, including from Jim . To remove any questions, he said at the time: "Memo to Moderna: You don't have to sell. You can sit on it." Jim was pointing out that predetermined sales can be canceled. Monitoring executive trades —both sales and purchases —is one piece to the larger buy-and- homework process that Jim advocates for investors who wants to own individual stocks. "In many cases, the insider sale might be immaterial," according to Eliezer Fich, a finance professor at Drexel University, who has extensively researched executive stock trades. Still, investors should "absolutely" keep an eye on both types of transactions for any signals they send to the market, he said. At the Club, we view stock purchases by executives and directors as bullish indicators. The decision to buy stock —when a sizable portion of executive compensation packages are already equity-related —appears like a straightforward sign of confidence in the enterprise. The only reason an insider would buy is to make money, Jim often says. Stock sales, on the other hand, are more nuanced and may be harder to draw conclusions from, particularly with predetermined plans. There are many reasons an executive might choose to sell shares, including everything from tax purposes to personal wealth diversification —just like Dimon's stated reasons for his planned sales. The Securities and Exchange Commission earlier this year enacted tougher disclosure rules for predetermined stock-trading arrangements—known as 10b5-1 plans—in an attempt to limit abuses, though many experts say there is still room for improvement. But, in general, the changes offer more assurance that stock sales are done in good faith. Plans made before then were grandfathered in. INSIDER STOCK SALES Executive stock trades are usually disclosed through SEC filings known as Form 4 documents and accessible through the regulator's EDGAR database —the electronic data gathering, analysis, and retrieval system. Thanks to the changes implemented earlier in 2023 , these filings now contain the most important piece of information for investors to make sense of a transaction: whether it took place as part of a Rule 10b5-1 trading plan, or was done on the open market. Of course, open-market sales are not automatically nefarious. But they will be viewed differently and often more critically than one completed through a Rule 10b5-1 plan, according to Chester Spatt, a finance professor at Carnegie Mellon's Tepper School of Business and a former chief economist at the SEC. The very nature of their jobs means executives are in possession of material, non-public information quite frequently —and deciding to buy, or sell, stock based on that confidential info is against the law. At the same time, the market recognizes there's an "important, legitimate basis for selling" stock, Spatt said, particularly because equity grants nowadays make up a large portion of their total compensation package. Rule 10b5-1 trading plans came into the fold just over two decades ago to reconcile these two discordant facts. Adopting Rule 10b5-1 trading plans gives public-company executives a way to protect against allegations of illegal insider trading in the future. Essentially, these plans allow executives to establish a plan for how —and when —they want to sell stock over a given period. Executives are supposed to adopt a plan in "good faith," at a time when they did not possess material, non-public information. The plans can vary in structure and complexity, but generally must specify the amount, price and date on which the security will be sold, or bought. More complex plans may be structured around a formula that determines when and how much stock will be sold. Third-party brokers execute the trades. "The executive could say, 'I'm going to be selling X amount of shares in three-month intervals over the next two years," Fich, the Drexel University professor, explained in an interview with CNBC. "Nine months from now, one of those transactions is executed, and all of a sudden it happened to coincide with a patent approval that's thought to be really, really important for the firm, which causes its stock price to increase. [The executive] can say, 'Well, I set this up about a year ago. I didn't know this was going to happen.'" Under the new SEC rules to address perceived shortcomings with 10b5-1 plans, a company's executive officers and directors are now subject to a mandatory "cooling-off" period, which requires them to wait at least 90 days from the time a 10b5-1 plan is adopted or modified before they can trade. In a 2021 paper , researchers at Stanford University and the University of Pennsylvania's Wharton School argued that short cooling off periods —or none at all, with trades occurring the same day as adoption —were among the biggest red flags with Rule 10b5-1 plans. "We find that trades of plans with short cooling-off periods avoid significant losses and foreshadow considerable stock price declines that are well in excess of industry peers," researchers wrote later in the paper. They added, "With longer cooling-off periods, opportunistic trading disappears." Under the SEC modifications, companies now must disclose in their quarterly 10-Q and annual 10-K filings whether any officers and directors adopted, modified or terminated a Rule 10b5-1 plan during the reporting period. For example, in its most recent 10-Q , Club holding Meta Platforms (META) disclosed that Chief Financial Officer Susan Li entered into a Rule 10b5-1 trading plan during the three months ended June 30. The plan is scheduled to end Dec. 31, 2024, according to the filing. This new requirement seeks to partially address a shortcoming that academics including Drexel's Fich have highlighted in research on executive stock trades: The ability to opportunistically cancel, or change them, without notice to the investing public. While a plan cannot be modified if the executive is in possession of material, nonpublic information, it can technically be canceled at any time , Stanford and Wharton researchers noted. In the past, there would never be an SEC filing for a trade that didn't occur because of a terminated plan. Not anymore, which is good news for investors because the additional information around plan adoption, modification and cancellation can, over time, help investors appropriately interpret the insider stock sales. Drexel's Fich said he believes a major lingering "loophole" with Rule 10b5-1 trading plans is the use of limit orders, which in practice can prevent stock from being sold if it falls below a certain price on the day it was supposed to be sold. In its December 2022 report announcing amendments to Rule 10b5-1, the SEC said insiders may use limit orders in their trading plans to help protect against "significant market fluctuations" over the months "and even years" that the plans are in effect. In that same report, the U.S. regulator indicated it was concerned about "abnormally profitable insider trading under Rule 10b5-1," which has been documented in various academic studies. However, it said it appears limit order use "cannot account for the entirety of the abnormal returns documented" in research studies. The SEC opted to still permit the use of limit orders, given that enhanced disclosure requirements may make it easier for other market participants to "gauge some information about the officer's or director's trading strategy," and possibly sell ahead of them, pushing down the stock price by the time the executive's next tranche of sales is executed. The SEC's new rules also limited executives' ability to have multiple overlapping plans and placed restrictions on the use of single trade plans—two additional practices that had drawn scrutiny. Now, executives can only employ one single-trade plan over a 12-month period. 10B5-1 SALE QUESTIONS To place executive stock sales in the proper context, investors should consider how much stock in the company the insider owns after the trade is completed. Fich told CNBC he asks that question regularly. As an example, he pointed to sales by a handful of executives at Coca-Cola (KO) earlier this year that he chalked up as the non-concerning variety. "There might be some troubling sales, in general, when many executives are selling a lot of shares at the same time," Fich acknowledged, but Coke's recent history doesn't rise to that level when considering the larger picture. "Coca-Cola insiders sold about $2.7 million worth of shares over the past three months, but these guys own $1.8 billion worth of shares" in a company with a market value over $200 billion, Fich explained in early August. "So, I'm not worried." In a follow-up exchange with CNBC, Fich also noted the net effect of Coke's insider sales was partially offset by the exercise of stock options. Such was the case with Chief Technical Officer Nancy Quan's trades in early May, according to Form 4 filings . Quan exercised stock options that resulted in the acquisition of 75,826 shares, on May 2, and the same day sold 85,906 shares. She owned 219,790 shares of Coke before the two transactions, and ended the day owning 209,710 —a decrease of only 4.6%. This illustrates that, with insider sales, the devil is in the details. Putting it all together, executive stock sales that amount to only a tiny fraction of an insider's overall holdings are unlikely to be cause for immediate concern —just like recent transactions from Salesforce co-founder and CEO Marc Benioff. Despite a steady series of sales since mid-July, Benioff's overall stake in Club name Salesforce (CRM) has declined only 4.6%, to around 25.27 million shares, securities filings show. Benioff remains the largest individual shareholder in Salesforce, owning a 2.6%stake that's worth around $5.2 billion based on recent stock prices. Put another way, Benioff's sales have been relatively minor, considering how much Salesforce stock he still owns, and how much his economic interests still align with the rest of the customer-relationship-management software group's shareholders. Another assuring fact: Benioff's sales continued to occur, even as Salesforce's stock declined from around $229 per share in July, to around $205 this month. Investors should also consider executives' individual histories when assessing their latest transactions, Carnegie Mellon's Spatt suggested. "If the executive has a history of selling a certain number of shares —or a fraction of his portfolio —each period, I'd be less concerned about that than I would be with very spikey and unusual sales," Spatt said. This is hardly the first time Benioff has steadily sold shares of Salesforce, not in conjunction with the conversion of stock options. For example, a similar sequence took place beginning in September 2020 and continued through October. He also sold a basket of stock in November 2021 and November 2022, according to SEC filings reviewed by CNBC. INSIDER STOCK BUYS After the stock market closed on May 12, 2022, then-interim Starbucks CEO Howard Schultz disclosed in an SEC filing that he had bought roughly $10 million worth of the coffee chain's stock. It came at a rocky time for the company, as it sought to counter a growing unionization push among its baristas. On that day, Starbucks (SBUX) shares had closed under $70 each for the first time since April 7, 2022 —in the throes of the first wave of the Covid pandemic while stores were temporarily shuttered. In the first trading session after Schultz's May 2022 announcement, shares of Starbucks soared 8.15%. The market's reaction to Schultz's purchase demonstrates that Wall Street —and the Club, too —likes to see insiders buying their own stock. We started a position in August 2022, shortly after the Schultz buy. It's typically interpreted as a sign of confidence in the company's outlook. Otherwise, the thinking goes, why would the executive put their own cash to work when so much of their compensation is already coming in the form of securities? "It's not so common for the executives to be buying stock in the company," said Carnegie Mellon's Spatt. "In and of itself, that's part of the reason why it's a pretty positive signal. … The executive is naturally so long in the stock, because of the structure of his compensation. For the executive to be buying … that must mean he's very optimistic." That's the message we took in June 2018, when Nikesh Arora was appointed CEO of Palo Alto Networks (PANW) . Not long after, Arora bought around $20 million worth of stock in the cybersecurity firm in open market transactions. Arora's big bet helped attract us to Palo Alto Networks for the first time, realizing that the executive was quite literally putting his money where his mouth was. Although we left the stock for a few years, beginning in September 2019, we returned in February as the seeds Arora planted upon his arrival were sprouting a story too good to ignore any longer. More recently, Broadcom (AVGO) board member Check Kian Low bought $9.6 million worth of stock in the company following its post-earnings decline — more than tripling his stake, to 15,951 shares. Jim believes there was initial confusion about Low's reason for buying —namely, was it to meet minimum-ownership levels required by Broadcom board members? That has since been proven to be an open market purchase. And, we take that as a very encouraging sign for one of the newest Club holdings. In moments of market-wide turmoil, executive stock purchases can take on broader importance to the rest of the investment community, soothing collective fears. Such was the case with Dimon's now-legendary purchase in 2016. The increased insider buying activity observed in March 2020, as the pandemic roiled global stock markets, also was viewed at the time as a strong expression of confidence on top of the unprecedented monetary stimulus unleashed by the Federal Reserve. The S & P 500's Covid-era low came on March 23, 2020. Since then, the index has roughly doubled. Insider buying in March 2020 –including about $5 million from Charles Scharf, CEO of Club holding Wells Fargo (WFC) —reached its highest level since March 2009, CNBC reported at the time , citing data from Washington Service, a firm that tracks such transactions. As it happens, March 2009 is the same month the S & P 500 hit its global financial crisis low . To be sure, even though executive stock purchases are a bullish signal, that doesn't mean future gains for the stock are automatic, cautioned Columbia Business School professor Sehwa Kim. Investors should be mindful that some executives may be "overconfident about their capability" to create value at a firm when they decide to buy its stock, Kim said in an interview with CNBC. "Whether the firm's prospect is truly good or not, they have a strong belief in their ability," he said. Club holding Foot Locker (FL) offers a lesson in interpreting insider purchases, and the patience that investing in the stock market requires. This year, Foot Locker CEO Mary Dillon, revered for turning around at Ulta Beauty (ULTA) , has twice bought stock in open market transactions —buying about $501,000 worth of shares on March 28, then nearly $250,000 worth about two months later, on May 30. The first purchase of 12,614 shares came at an average price of $39.74, not long after Foot Locker held an Investor Day that detailed Dillon's revitalization strategy for the company. That excited Wall Street analysts and investors, including our portfolio managers at the Club. The second buy, which totaled 9,525 shares, came at $26.20 each, on average. As those dramatically different price levels indicate, a lot happened to the market's perception of Foot Locker between those two transactions. The main turning point arrived May 19, when the company's disappointing first-quarter earnings report wand revised guidance sent shares tumbling 27%. Right now, Dillon may very well be as optimistic on Foot Locker's long-term prospects as she was in late March when buying that first tranche of stock —even if she's underwater on that lot. She signaled as much to the market with May's purchase and in September when she bought $100,000 worth of Foot Locker stock, at an average of $18.17 per share. These transactions might offer a modicum of assurance, but don't completely change the reality that this year has been a roller coaster for shareholders. Foot Locker shows that the favorable signal being sent by an executive stock purchase might be obscured, or forgotten, by other, more-pressing facts. In the retailer's case, its first-quarter results and lowered outlook —dragged down by discounting and inventory issues —painted an uglier near-term picture than any insider buys. Indeed, even after Dillon's second buy on May 30, Foot Locker shares fell on May 31 and June 1. To be sure, the message Dillon attempted to send may breakthrough down the road as the turnaround plan progresses. While disappointed in the performance of Foot Locker shares, we recognize that overhauling a troubled company takes time —even if it's taking longer than we thought. BOTTOM LINE As part of the buy-and-homework process, we keep tabs on how executives, particularly in the C-suite, are trading their own stock while recognizing it's only one piece of the larger investment-research puzzle. Insider stock sales are best analyzed with a big-picture context, given we know that some sales can be misinterpreted for reasons that include optics, like when the CEOs of drug companies making Covid vaccines were selling stock through predetermined plans and making huge profits. The necessary context starts with understanding whether the trade was made pursuant to a Rule 10b5-1 plan. Fortunately, the new SEC rules should enhance transparency. Then, taking into account the selling executives' remaining ownership and previous history adds a more robust frame of reference. On the other side, the market views executive stock purchases quite favorably, and so does the Club. Compared with a tiny stock sale executed through a predetermined plan, executive stock buys generally send a much stronger signal: The executive wants to make money, too. And in some cases, like in the case of huge stock buybacks by a company, we're happy to be right there to buy alongside them.
