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Directors Dealing; Another View Point

When considering whether Directors Dealings should be part of an investment approach it is often very easy to look just into particular companies and directors, estimating the significance of a transactions timing and so on.  Such an approach has been proven to work via a large number of academic studies, but sometimes an overview of the market as a whole can also give many insights.

At Directors Deals we create reports that try to give our clients a perspective of this, using buy-sell ratios.  Generally speaking directors buying shares is more significant than a director selling.  Once dividend re-investments and option exercises etc have been removed there is really only one reason why a director buys shares and that is to make money.  The same cannot be said for selling, this could be to facilitate a new home purchase rather than any thoughts as to the future share price.  Also directors tend to buy in small numbers, building up a holding, compared to selling which tends to be in much larger blocks.  This point is made by looking at statistics for the UK in January 2011.  This shows 393 directors purchased a total of £19 million of shares, whereas 109 directors sold £218 million of shares.

By looking at the ratio of the number of directors buying shares compared to the number of directors selling shares in any calendar month we can get a good insight into their view on the market.  Looking at data collated over the last 12 years, and using buy sell ratios we can see some clear trends.  Looking back at the financial crisis in late 2008 it showed up a standard response of directors of UK companies.  During the months of October and November 2008, the number of directors buying increased by 20% when compared to the previous year.  This was almost double the numbers of directors in 2009 and 2010. The table gives an illustration of consecutive Octobers and Novembers:

 

2007

2008

2009

2010

No. Buys

1279

1523

917

845

No. Sells

325

187

324

272

Value Buys (£m)

127

186

63

57

Value Sells (£m)

423

82

595

265

From the table it is immediately obvious that many more directors entered the market in 2008 comparatively. What is also interesting is the number of selling directors that sat on the sidelines.  In fact in October, November and December of 2008 we have three consecutive months where directors bought more by value than directors sold.  Just to illustrate the point, since Jan 2007 this has only happened on 5 other occasions, most of which can be explained by tax law changes, out of a possible 49 months.

There are a couple of points we can draw from this.  Firstly it suggests that the mentality of directors is that while the market is weak it is an excellent time to stock up.  Secondly it shows that they have much more faith in their own companies than the market does.  Lastly it provides a very strong argument that directors rather than being non-market savvy investors know when to spot a bargain.  All three points are proven further as 2008 seems not to be a one off.  During the bear market following 9/11 directors were significantly out-buying compared to our own averages.  This was most apparent during times of particular market weakness.

Directors Deals also cover over 45 markets worldwide (full details of which can be seen at our website), and interesting parallels can be made across borders.  European markets showed the exact same trends during the two bear markets of the decade.  In fact it was even more pronounced with the number of directors trebled that of previous and following years both by count of directors and value of trades.  This cements the view of European directors taking very long investment views, and stake building while it is cheap to do so.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.