Watching the Directors
The company insiders!

Watching the directors 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 the company directors 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.

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 as well.

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 fund the purchase of a yacht, or their next overseas trip - or whether they have real concerns about the company performance into the future.

An additional aspect to be aware of is that 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 in the Australian sharemarket illustrate this case.

A downturn in the market followed by large-scale shorting of the vunerable company's shares, that is, selling shares that the shorters did not own, forced some directors who had margin loans to sell shares to 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 - which is what company directors are supposed to do!

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

Return from Watching the Directors to Best Investment Strategies