Follow The Leader?

Tuesday, 26th May 2015 10:50 - by Moosh

Follow The Leader?

It is often the case that investors like to follow the leader, that is, when a company director buys shares in their own company, investors tend to see that as a favourable move and follow the actions of someone who should have a good idea of how their company is ticking along. This course of action may seem like common sense.

But do we live in a different world to company directors? Generally, do insiders of the company buy and sell different shares to the rest of us or the same shares? I would argue that most will be trading the same shares as us on the outside. Now if there are any directors of companies who have been introduced to my midweek watchlist via myself or other investors, then it must be obvious for directors to have read between the lines of the point of my regular watchlist to have figured out that if they time their buys according to when their company appears on my midweek watchlist, then investors are likely to follow. If directors have not read between the lines, then I have just spelt it out in plain English.

If you are familiar with the companies which appear on my midweek watchlist and you happen to notice a director purchase for any of these companies, then take a look when this purchase was done. If the director buy was made when their company recently appeared on the midweek watchlist (and if the price hasn’t reacted sustainably in an upward fashion), then there’s a good chance that investors buying following the director purchase are following the leader usefully. However, if a director buys when the company has not appeared on the midweek watchlist for quite a while (maybe a few weeks, especially if the price has already gone up quite a lot from a recent low), then it might be best to not follow the leader immediately in such cases and instead, wait for the company to appear on the midweek watchlist before assessing a buy based on fundamentals. However, investors also need to consider any director purchases in the context of weekly and monthly up/downtrends.