BUYS AND SELLS FROM THE BOSSES When investors should take note of directors trading their own shares
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hen a director of a firm sells shares there could be any number of reasons for their decision, the most common one being they need to raise cash to pay an income tax or capital gains tax bill. However, when a director dips into their own pocket to buy shares there is usually only one reason – they expect the price to go up. The question is, can investors rely on insider buying as a useful tool when trying to pick stocks?
‘THE ILLUSION OF CONTROL’ We should stress that when we say insider buying or selling we aren’t referring to insider trading, which is based on having specific, unpublished, price-sensitive information, and is strictly banned by the FCA (Financial Conduct Authority). What we are talking about is directors buying or selling shares in their own company completely off their own bat on the basis that
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| SHARES | 11 August 2022
By Ian Conway Companies Editor
they are either too cheap or too dear. Tom Stevenson, investment director at US asset manager Fidelity International, cautions that insiders can suffer the same emotional biases as any other investor and can often be ‘too quick out of the blocks when it comes to buying their companies’ shares’. Studies show that more often than not managers are over-confident about the future returns from their companies’ shares. ‘One study asked finance directors on a quarterly basis how confident they were about both the economy and their own company’s prospects,’ relates Stevenson. ‘The study found they were routinely more confident about their company than the economy as a whole – a classic case of overconfidence
