The Company Insider

May know more than you, and provide you with a value investing opportunity!

If a company insider, such as a director or the CEO, is buying more shares in the company, it is worth taking notice of what information they may have.

Watching the directors and CEOs of companies is a stock market investing strategy that may be used in combination with value investing.

It works on the principle that if a director or directors of a company are currently buying their own company stock, it is an indication that the company’s performance (and hence share price) is likely to significantly improve down the track.

If anyone should know about the state of health of a company then it should be a company insider on the board of the company.

This information can be then used with other information at hand to decide whether to follow their lead and buy into the company.


Watching the Directors

But how can you go about watching the directors? I do so from the website of my online broker.

Companies are required to announce any changes in the holdings of their directors. The information may also be available from the stock exchange.

Unfortunately, like most things in life, the reality is not always that simple.

There may be other reasons why directors are picking up shares, such as converting options that they have been assigned as part of their role, or re-investing their dividends though a dividend re-investment plan (DRP).

So I look for large purchases by directors which generally can be distinguished from smaller allotments of shares provided as part of their role, or through a DRP.

Of course, the opposite case is where directors are selling significant quantities of shares in the company.

In this case it is difficult to know whether they are cashing in some shares to diversify or fund a lifestyle - or whether they have real concerns about the company performance into the future.


But Beware of Directors' Margin Loans!

Some company directors may be using a margin loan to pick up a significant parcel of their company's shares.

As indicated elsewhere in this website, margin loans come with additional risk - and in this case, not only for the company director. Recent events illustrate this case.

The global financial crisis followed by the downturn in the market resulted in large-scale shorting of some vunerable companys' shares; that is, the shorters sold shares that they did not own.

This forced some directors who had margin loans to sell shares to cover or avoid margin calls on their loans.

This additional forced selling by directors further drove down the company's share price to levels which threatened the viability of the company, but which allowed the shorters to buy the shares that they had shorted at a much reduced price and thereby make a tidy profit.

Hopefully, but don't hold your breath, stock exchange regulators will, in the future, move to require directors to declare margin loans and thereby protect the interests of shareholders.

This is what company directors are supposed to do!


To Conclude

For this reason I view the stock market investing strategy of watching the company insider with considerable caution, and as only one aspect of vslue investing to be used in conjunction with other information about the company itself.

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