‘Insider purchases, and not analyst recommendations, possess incremental predictive power for future stock returns’ (Hsieh, Ng and Wang, 2003- Analyst Stock Recommendations and Insider Trading Activities.

Why look at directors share purchases?

I’ve spent years and years listening to what directors of listed companies say. I find their body language, relationships with each other, and what they don’t say to be much more informative.

I’ve also started to analyze their share dealings. My theory is that it’s what directors do with their own money that sends the real message about how investable their company is.

Actions speak louder than words.

For many years I have sat in meetings between company management and investors. The company have prepared themselves for the presentation, they know the investor well, or if they don’t they will have a very clear knowledge of the likely course of the discussion. Therefore they have prepared answers.

An investment in the company by the director themselves, in cash, is a clear signal of the directors perception as to the current valuation of the company’s shares. In the US this is termed ‘insider activity’ or ‘insider dealings’, the director being an ‘insider’ at the company.

Options, Executive share schemes, and other methods of increasing directors ownership are often imposed on the directors by the company, or offered as a way of buying half price shares by the director (in the cases where the company matches the executives purchase). It is believed that an increased ownership by directors aligns them more closely with investors. These are therefore not a cash investment by the director, and in my view should not be taken as a signal by investors.

The big caveat in using directors dealings is that you need to be fairly long term in your outlook when using them as a criterion for investing. Directors are limited as to when they can legally buy and sell shares. They cannot trade between the closing of the financial period and the reporting to the market of that information, often two months later. Companies report at least twice yearly, sometimes quarterly, so the dealing ‘window’ available to directors is oftentimes very narrow, and not necessarily the optimum time, price wise, to buy or sell shares.

For other peoples thoughts about directors dealings follow the links below:

Inacademy.com – UK investor education site, written by financial journalists

Moneyterms – advocates looking at consistent patterns of dealings by directors.

Moneyweek– ‘an extra tick in the box’

Standard Life Investments– Global Investment Strategist Richard Batty has analysed directors dealings as an investment tool. For his excellent summary on how professional investors interprete directors share dealings please click here.

Hargreaves Lansdown – Head of UK Equities Richard Hunter has this to say on directors dealings (full text here): ‘the trends of dealing in a company’s shares from the senior management, or indeed the number of the shares that the board already hold individually, can be representative to the market of the board’s confidence in future prospects’.

State Street Global Advisors (SSGA) incorporate signals from UK directors share dealings into their stock selection process.

Tom Bulford, in his blog The Daily Reckoning, discusses directors share dealings, and how to invest to benefit from them ‘Directors Buying Shares Spells Good Fortunes’.

Inside Analytics – a service available to investors and banks, discussed in an article in the FT