One example of a hands-off system when share trading is to simply follow the signs. And you surely cannot get any better signs than directors, for they possess insider knowledge that we mere mortals cannot. And while they may be barred from disseminating this knowledge, part of it may be quite clear in their purchase intentions of stock of their own company.
Since all such ‘insider’ transactions are reported to the market in the form of an RNS report, it is fairly easy to keep track on, and as such can form part of a strategy that provides signals without too much thinking behind it. Of course, this may be a setup for failure, but stakes will be small. Quite often, there may be no reason to buy a particular share other than that a director has bought it – this alone is not something you should invest heavily in.
A quick glance at the market and the various share alerts reveals that directors acquire shares in several ways – some can be awards, some can be options that are exercised. These two options tend to be perks that come with the job, or make up part of their salary. The third option is simply buying shares for cash at the market rate, and that is the one we are most interested in.
Note that the converse of this, directors selling shares for cash – doesn’t give rise to an opposite motion (to short a share). Here, the decision to sell could be driven by many factors such as:
- Director needs money in order to fund their lifestyle, ie new house
- Director needs money in order to fund other investments
- Director has too many shares and wants to diversify risk
- After share awards or option exercise, sale is to provide cash (ie sale would have gone ahead at any price)
- Director believes that share price overvalues the business
- Director can forsee bad news on the horizon which will adversely impact prices
As we can see, whilst bad prospects for the future can be a catalyst for a director share sale, it isn’t the only reason and some of the other ones are quite legitimate. If you look at the news, share sales by directors – and for large sums – is a regular thing.
What we are interested in is the director purchases. The reasons for a director purchase for cash (not awards or rights) are slightly narrower:
- Director believes the market undervalues the business
- Director wants to stir up further market confidence
- For small firms, directors want additional control
These arguments get stronger as more money is involved. Whilst what is and what is not a material sum of cash varies from business to business, the scales on a personal level are slightly closer as executive remunerations do not follow the wide variations of market capitalisation. So a sum of £10m would not be so material to a firm like Unilever, however, a purchase of £10m in shares by a Unilever chief would make the market sit up and notice. At the least, people would be asking ‘why are they doing that’? And with some luck it may be that this draws a line of support for future prices as a base valuation.
So the basic strategy becomes apparent: follow the directors. It is important not to get involved with every purchase. People topping up a couple of thousand pounds in shares is perhaps not a meaningful signal on its own. We look for large purchases that stick out – typically hundreds of thousands, or into the millions, particularly from the CEO or Financial Director. The news articles are very easy to scan once per day and because the transactions have to be reported, nothing is missed out.
One reason that will not count is if there is a share purchase by a very new CEO/FD. I believe that these signals are less reliable, and in the first days of a job people tend to be the most optimistic, and there often is a desire to see ‘skin in the game’.
My initial stakes will be limited to £100, and purchased at the ultra-low cost share dealers Desiro or Trading 212. This is preferable to taking on the spreads as the spreads will not accommodate a position size this small and even if it could, the overnight costs of holding would not be efficient (taxation may force a different opinion in future).
A table of results can be seen here:
|Date||Company||Director Purchase||Date Open||My Trade||Close Date||Close Trade||Profit|
|4/4/18||Polypipe (LON:PLP)||£488,740||4/4/18||27 Shares (£98.01)|
|4/4/18||IP Group (LON:IPO)||£209,500||4/4/18||84 Shares (£97.59)|
|18/4/18||Keller Group (LON: KLR)||£241,300||18/4/18||10 Shares (£99.09)|
|9/5/18||Convatec (LON:CTEC)||£13,444,560||9/5/18||51 Shares (£119.63)|
|15/5/18||3i Group (LON:III)||£2,425,000||15/5/18||11 Shares (£110.17)|
|25/5/18||ITE Group (LON:ITE)||£305,210||25/5/18||87 Shares (£120.75)|
|11/6/18||Inchcape (LON:INCH)||£201,532||11/6/18||16 Shares (£122.08)|
|11/6/18||Pets at Home (LON:PETS)||£255,200||11/6/18||94 Shares (£120.60)|
|21/6/18||BT Group (LON:BT)||£297,655||21/6/18||56 Shares (£120.58)|
|13/7/18||Urban and Country (LON:UANC)||£305,000||13/7/18||33 Shares (£100.49)|
Pure Passive Investor. Always looking for ways to make money (but not myself) work harder.