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Directors still get it mostly right - even in a bear market.
2 Years ago we did a comprehensive analysis of 4 years worth of Directors buying in their own shares and the results were phenomenal. In that time the Directors outperformed the general market by a factor of two with a brilliant average one year gain (including losses) of 51%*. you can read this report here...
However that was in a raging bull market from 2003 to 2007. Since then we have had the Global Financial Crisis (GFC) come in to play so we thought it would be interesting to see how our Director friends fared in a big bear market.
A difficult market by anyone’s standards
The beginning of 2008 had the all ords sitting around 6000 points. It literally fell to below 3500 before regrouping to where we are now at a tad over 4500 points. With this in mind, we now look at the data of 4729 Director trades over that time. Let’s look at some of the stats.
Trades per year.
|
2007 |
1740 |
|
2008 |
2989 |
|
2009 |
1424 |
You can see that in the year of the big crash, the Directors became very aggressive by almost doubling the number of trades with the expectation of a return to normal - just like the rest of us poor traders in this time. The long bull market had led us to believe that the market would bounce back and we’d all get rich again. Unfortunately, the next bull market was slower to show its head than we all expected and 2009 saw Director buying becoming more conservative.
So how did they perform?
Over this 2 year period, the average current gain* on all buy transactions was 31%. Not a bad result in the difficult market conditions.
Let’s look a bit deeper...
|
Winners |
Losers |
Total |
Winning Percent |
Average Gain |
Average Win |
Average Loss |
|
2458 |
1949 |
4407 |
56% |
31.31% |
87.41% |
-40.24% |
Out of all the Directors trades 56% of them are currently in profit. Whilst this figure is down on our previous report, it’s still not a bad result. But here’s an interesting part - the average win is a whopping 87% whilst the average loss is -40%
We then looked deeper to see if the size of Directors trades had any significant importance. Eg. Did Directors spending large amounts of money have a better return? Surprisingly, the answer was no. Trade size didn’t have much impact on their trade returns. There was a small exception where we saw trades sizes between $500K and $1M performing slightly better than the rest. It just goes to show that the people who could afford a million bucks to invest aren’t necessarily smarter than someone with only $10K. In fact some of them got it entirely wrong but we’ll look at that shortly.
Some Big Winners...
NRW Holdings (NWH)
Now, here’s a sign of confidence. The Directors in NRW Holdings started buying aggressively after a big fall. This proved to be a very profitable strategy. In fact, Jeffrey McGlinn’s first investment of $166K is now worth almost $2 million.
As analysts of Directors activity, this is something that we have seen on a regular basis and often works. When there is a large amount of Director buying after a major price collapse, it is showing a sign of confidence from people who should know whether the stock has been oversold or not. More often than not they are right.
Flight Centre (FLT)
Graham (Screw) Turner and three other Directors pounced on Flight Centre when the share price fell below three dollars. Only 9 months later the price is around $20 per share.
Whitehaven Coal (WHC)
Anthony Haggerty didn’t mess around when he spend almost $1.4M after the share price had collapsed. His brave investment is now worth around 3 times that only 1 year later.
Customers Limited (CUS)
Talk about being confident. The Directors of Customers Limited kept buying and buying. Now they are sitting pretty on an average gain of around 250%.
Now for some big losers...
Transpacific Industries (TPI)
Terrence Peabody was once the richest man in Qld however his recent investments in Transpacific Industries didn’t prove to be that smart. Here we can see a recent investment of $394K lose its value by 60% in a year. However this pales into insignificance when you consider that he bought over $70M worth of shares in 2007 when the price was over $10 per share. The stock is now worth $1.20. Ouch!
Alesco Corporation (ALS)
These Directors definitely didn’t see the GFC coming. Some of their trades fell to approx 10% of their initial value. However, that didn’t make them lose confidence. They continued buying on the way down and jumped in again at rock bottom. This is the age old strategy of ‘averaging down’ and it should give you some confidence when you see Directors do it.
The verdict...
If you are a trader, your job is to do your research before making that all important investment decision. There is no holy grail - i nstead, there is a jigsaw puzzle. The jigsaw pieces are your different research methods. You might look at fundamentals, technical analysis, broker reports or even rumours to help you find a stock to trade. By analysing Directors trades in conjunctions with your other standard research tools you have essentially found another piece to your jigsaw puzzle. In fact, it’s a very big piece considering you are looking at the actions of people who really should know about their company.
* Important Notes:
1. Past results do not guarantee future performance or success
2. These results have been taken manually from notices given to the asx. Because of the complexities that often appear in these notices, there may be some exclusions and/ or errors in this the data. However, because of the large sample size, we believe the results should be reasonably accurate.
3. Whilst care is taken in analysing this data, we cannot guarantee complete accuracy.
4. During this period, many stocks have had corporate actions like share splits and whilst we have done our best to deal with these we may not have identified them all.
5. Share price data used to calculate results was at 1st Feb 2010. |
