Sunday, January 23, 2005
Insider trades don't matter, or do they?
A popular feature in the financial press is a regular insider dealing round-up. Each issue of Investor's Chronicle contains a feature detailing director's trades in their own company's shares.
This constitutes insider dealing and is strictly regulated. There are only certain intervals in the company calendar when it is permitted for directors to buy or sell. For U.K. listed companies, directors are bound by the FSA's Listing Rules. Director dealing is verboten
A lot of investors infer valuation from directors' sales. There's a lot of sense in that strategy, directors have better information than other investors and are ideally placed to evaluate the company's prospects and trading. Some conclude from a director sale that the shares have become fairly valued or even over-valued and a director buy shows a greater confidence in the future than aggregate of the market's.
Unfortunately, the answer isn't that simple. This theory assumes company directors are capable of not only taking the pulse and giving a prognosis on the fitness of their company but are also expert at ascribing a fair value to the company's equity. It is also assumed that directors only buy or sell because they consider a trade at the price offered to be in their favour and not for more mundane reasons such as selling to bankroll a house move or buying as a gesture of commitment.
I'm undecided on the relevance of director's deals and whether they do indeed leak useful information. On two occassions recently I have ignored large director sales of shares I also owned. In October 2003, Stephen North, a Ben Bailey director, sold 6,000 shares at 389p, announced here and as recently as last Tuesday, Tom Cross, Dana Petroleum's Chief Executive made a huge sale at 465p. In each case, the news squeezed out negative sentiment and nervous holders like puss from a teenager's spotty visage. However, the news hit prices only temporarily before they recovered to higher levels. In Ben Bailey's case, the shares were as high as 480p in 2004 and Dana have this week pushed to a new high of 479p.
Though a well-reasoned argument for considering insider trades exists, my experience has borne out ignorance as more profitable. That's not conclusive though and I remain undecided on how to treat this extra information.
Dirk Jenter, assistant professor at MIT investigated this question in his study Market Timing and Managerial Portfolio Decisions and concluded:
there is little evidence that managers are able to earn economically significant excess returns with their trades. This could be due to a variety of reasons, among them that insider trades may be driven by motivations other than inside information
Here's hoping Ben Bailey and Dana Petroleum continue upwards, adding value to my portfolio and Mr Jenter's findings and perhaps leaving messrs North and Cross lamenting their decisions to sell.
The Artful Dodger
This constitutes insider dealing and is strictly regulated. There are only certain intervals in the company calendar when it is permitted for directors to buy or sell. For U.K. listed companies, directors are bound by the FSA's Listing Rules. Director dealing is verboten
- for short term speculation
- during close periods i.e. the two month period before the announcement of annual of half-yearly results
A lot of investors infer valuation from directors' sales. There's a lot of sense in that strategy, directors have better information than other investors and are ideally placed to evaluate the company's prospects and trading. Some conclude from a director sale that the shares have become fairly valued or even over-valued and a director buy shows a greater confidence in the future than aggregate of the market's.
Unfortunately, the answer isn't that simple. This theory assumes company directors are capable of not only taking the pulse and giving a prognosis on the fitness of their company but are also expert at ascribing a fair value to the company's equity. It is also assumed that directors only buy or sell because they consider a trade at the price offered to be in their favour and not for more mundane reasons such as selling to bankroll a house move or buying as a gesture of commitment.
I'm undecided on the relevance of director's deals and whether they do indeed leak useful information. On two occassions recently I have ignored large director sales of shares I also owned. In October 2003, Stephen North, a Ben Bailey director, sold 6,000 shares at 389p, announced here and as recently as last Tuesday, Tom Cross, Dana Petroleum's Chief Executive made a huge sale at 465p. In each case, the news squeezed out negative sentiment and nervous holders like puss from a teenager's spotty visage. However, the news hit prices only temporarily before they recovered to higher levels. In Ben Bailey's case, the shares were as high as 480p in 2004 and Dana have this week pushed to a new high of 479p.
Though a well-reasoned argument for considering insider trades exists, my experience has borne out ignorance as more profitable. That's not conclusive though and I remain undecided on how to treat this extra information.
Dirk Jenter, assistant professor at MIT investigated this question in his study Market Timing and Managerial Portfolio Decisions and concluded:
there is little evidence that managers are able to earn economically significant excess returns with their trades. This could be due to a variety of reasons, among them that insider trades may be driven by motivations other than inside information
Here's hoping Ben Bailey and Dana Petroleum continue upwards, adding value to my portfolio and Mr Jenter's findings and perhaps leaving messrs North and Cross lamenting their decisions to sell.
The Artful Dodger
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