Some people think I spend ages studying companies' income statements and balance sheets, and wonder how a 1-man-show can be successful at investing and cover the whole of the JSE. The truth is that I ignore most shares completely. If you ask me about my thoughts on a specific share I'll probably say I have no idea! My main modus operandi is spending about 5 minutes every day studying director sales/purchases, and then if something of interest arises, I put it through my valuation system (which is a topic for another day).
The Inside Traders
In the perfect world I remember getting taught about at university, all investors would have access to the same level of information, and there's no insider trading going on. In the real world, executive directors of companies have access to far more information than anybody else; and the good ones eat, sleep and breathe the company. If you don't believe executive directors have insider information, show me your copy of the monthly profit figures! Executive directors are amongst the first to know about the big deals going down, admin catastrophes and bad debts developing. Even ethical directors who avoid actively making use of information to (say) sell shares on bad news, often passively make use of their insider knowledge of bad news by not buying shares (when they're aware of unpublished seriously bad news)!
Please burn and destroy the above paragraph after you've read it, so that I can remain on friendly terms with directors!
Directors are required to disclose trades
Because of their special level of knowledge about a company, paragraph 3.63 of the JSE's listing requirements requires directors to disclose when they are buying or selling shares in the company they are a director of. And when these folk vote with their wallets, I take note ! Of course directors are also aware that lots of people are watching what they're doing, so it's possible for them to game the system!
Not all Director Dealings are Equal
Not all director dealings carry the same weight, for example:
Any share dealings arising from a Company's Employee Share Option Plan, as I don't feel these purchases are voluntary enough. BUT companies do not always report that the shares are being financed by the company - for example on the 18th Dec 2013 Rockcastle reported that 3 directors had purchased a large amount of shares in the company, but not that it was being financed by loans from Rockcastle.
Sales of securities I don't own and in industries unrelated to the ones I own, don't mean much to me.
Transactions for miniscule amounts (unless they're sustained over time to build into something substantial). Where possible, the size of the transaction should be considered against the director's total wealth (most of the time we don't know this).
Mixed messages (e.g. a director purchase in the midst of director sales).
Grey areas are transactions by spouses and non-executive directors. They carry some weight, but I don't see them as significant as transactions by executive directors.
They're Directors...not Gods!
William H. Bonney! You are Not a God...Why don't you pull the trigger & find out
Finally, we should bear in mind that whilst the directors may have insider information, they are not Gods, they may suffer from familiarity bias, and sometimes are not very good investors. A fundamental analysis should be carried out to check whether one can find the same value in the company that the director is finding (or not finding, as the case may be). Often, my conclusion after carrying out this exercise is that I don't see enough value to invest.
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