Avoiding value traps.

Stocks may appear cheap but may be about to get much cheaper.

If a great company is trading at a ridiculously cheap price then why is management not buying all it can from the open market?

I prefer to wait for management to buy in the open market. This simple strategy will help me avoid value traps.

As an example look at Moody's. A great company facing a few tough problems. I will not buy until the executives use their own money to buy in the open market. You can track insider buying at Moody's here.

Moody's Coproration MCO

Moody's (MCO) is an interesting company. To the unsophisticated like me it seems like they give you three letters like "AAA" and get a load of cash in return. Even Warren Buffett holds a stake. It seems like the perfect business to own - has a moat and has low requirements for capital.

What could go wrong? Recently the price has fallen on fears of lawsuits related to its role in the subprime lending mess. I am not qualified to comment but I feel that "Cogitarius" has done a good job summing up the issues on a Motley Fool board here.

So should I buy? Naah! If you know me you know that I have a way of avoiding value traps. I will not buy unless there is some confirmation from insider buying. You can see the insider trades for Moody's here. So if I see more insiders buying in the open market I will jump in.