You are currently viewing our desktop site, do you want to download our app instead?
Moneyweb Android App Moneyweb iOS App Moneyweb Mobile Web App
Join our mailing list to receive top business news every weekday morning.

‘Director dealings’ – what this means

There is a big difference between knowing the inner workings of a business and knowing how much its shares are worth.

Many investors firmly believe that you should follow “insider buying” closely. These investors’ believe that where there are lots of insiders buying their own script, you should follow suit.

Is this always true? Is this ever true?

Well, like usual, the answer is yes and no.

Here’s is some interesting background reading on insider trading thoughts in the US. Generally speaking, I tend to agree, but I am going to give an additional spin to the traditional theory here.

There is a big difference between knowing the inner workings of a business and knowing how much its shares are worth.

At the risk of making a massive generalisation, I find that management teams overvalue their own stock. This is simply explained in a list, one bias leading to the next: managers tend to be confident people, managers tend to back themselves, and, thus, managers tend to be overly optimistic regarding their company’s prospects. Hence, the combination of optimism and (potentially large) ego leads managers to value their companies as extensions of themselves at multiples the market would laugh at (and that are unrealistic).

Perhaps read this rather lengthy piece from Harvard Business Review to get an idea of what I mean by insider optimism and ego. Then consider the fact that I don’t believe that we have ever had a CEO of a gold miner that was a bear on the gold price…

Then there is the fact that most CEO’s of listed companies are great experts in their fields, but their fields are often not the valuation of businesses and shares.

Like I said earlier, there is a big difference between knowing the inner workings of a business and knowing how much its shares are worth. Even if a company is doing well, its shares may be overpriced.

The one exception may be financial companies, and specifically asset managers and investment holding companies.

If I see, for example, Coronation (CML) or Prescient (PCT) management buying their own stock, I sit up and take notice. Likewise with Anchor (ACG), Sygnia (SYG – Sygnia’s management team actually sold a large pile of their shares upon their recent listing), PSG Konsult (KST).

This likely also includes the investment holding companies that effectively buy and sell businesses for a living, for example, PSG Group (PSG), EnX (ENX), Stellar Capital (SCP), Brimstone (BRN) and a number of others.

Finally, even if the management team are blindly optimistic and clueless on how to actually value a stock, it is always encouraging to see them buying their script en masse. I would much rather have them buying the script than selling it.

After all, a person can sell a share for many reasons (of which overvaluation is only one of them), but a person only buys a share for one reason: they believe it will generate a good investment return.

Food for thought.

Keith McLachlan is a fund manager at AlphaWealth

This article was first published on here, and republished with permission.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.


Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.


Quite insightful as this is a question we see quite often,

Yes, its simple that you buy a share when you expect a return.
But selling is not that simple: there could be many factors; one of which I have always used – take your profit and move on. My grandfather reminded me that there is nothing wring with a profit/good return.
When I am a senior person and major shareholder in listed company – well then I need to communicate very clearly why I am selling, what % of my holdings I am selling etc.
I am reminded of a senior person in Raubex who recently (reportedly) sold shares of about ZAR150m. If I was a shareholder, I would be spooked – but when you realise the sale represents only about 50% of the holdings, then you relax.
Sens is very useful, but should be expanded for there to be more details provided with the sale of shares by a connected party.

End of comments.


Insider GOLD
ONLY R63pm

Moneyweb's premium subscription is a membership service which will give you access to a number of tools to take charge of your investments.
Choose a yearly subscription at R630pa - SAVE R126

Get instant access to all our tools and content. Monthly subscription can be cancelled at any time.

Follow us:

Search Articles:Advanced Search
Click a Company: