Online Stock Trading for Beginners - Does it Pay to Follow Directors' Stock Buys?
Among investors looking to get an edge in their stock trading and share dealing it has long been thought that Directors know when is the best time to buy shares in their own company. It does, after all, seem logical that they would. They have all the inside information on what they are doing and what they are likely to be doing in the near future and how their company is performing and how it is likely to perform and how this will affect the company share price. As a result, many investors or stock traders consider directors buying their own shares to be a good sign that they should also be buying that company's shares.Well, it seems that this is more than just a nice stockmarket theory or wishful stock trader thinking. Research has just recently been published by Professors Alan Gregory, Rajesh Tharyan and Ian Tonks of the University of Exeter into just how good a gauge directors' share dealings are in the UK.
On the Exeter University website there is a link to the 30 page pdf of their research into directors' share dealing, unfortunately that link doesn't work, so I did some research of my own and discovered the link that does work ! So strange as it may seem you will not find the pdf on the page where it is said to be on the Exeter University site, but you will find it if you click here ---} Insider Trading !
You may, however, not wish to wade through the pdf and just want to know the conclusions.
Does buying shares when directors buy shares in their own company actually work ?
The good professors conclusions are :-
- UK directors trade as contrarians
- There is on average an excess performance of about 10% per annum over 2 years following a directors buy in value stocks
- Their share buys generate long-term abnormal returns "over and above a simple value-glamour trading rule for value portfolios. These abnormal returns increase monotonically as we move along the glamour-value continuum". (It's English Jim but not as we know it!)
- Directors' share buys in small-value firms generate significant abnormal returns, which persist for over 2 years after the initial directors's share trade.
- Directors' share trades in large value stocks also generate abnormal returns over and above a simple value-glamour trading rule.
- Insiders who buy stocks know what they are doing.
- Directors' trading signals clearly generate significant positive abnormal returns on the buy side and small but insignificant returns on the sell side.
- Larger abnormal returns are concentrated in smaller value stocks in particular.
Hats off to the professors, but I suspect even FT readers will be hard-pressed to understand the report !
So how much did the directors make by buying their own shares ? Well as said above it seem to be an annual outperformance of around 10% but I got that information from the video below not the report ! You may have better luck, just click on the pdf link above. All I can say is that the returns were "significant positive and abnormal".
Another problem of course is that directors buy their company stocks at a better price than you will ever get, because usually once it has been published that directors have been buying shares in their own company, the price goes up and you are unlikely to see the price they got again, and if you do then the chances are that that particular company share price will not rise.
A recent unscientific study by the Motley Fool showed that, on average, directors made a gain of 56% over a year on shares they bought in their own company, but ordinary Joe Bloggs stock traders trying to follow the directors made an average return of 29%, not bad but the average return for the FTSE over the same period was 20%.
So the final conclusion on whether it is a good strategy to buy shares in companies that the directors have just bought shares in, is yes it is worth following directors buying generally but only if you can get your shares at something very close to what the directors paid for theirs.
The Small Investor: A Beginner's Guide to Stocks, Bonds, and Mututal Funds
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