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Tracking director share buying can make you money

Tracking FTSE 250 directors when they buy shares in their own companies does give you superior returns, new research shows.

Tracking director share buying can make you money

Following director dealings in their own companies has been a popular investment strategy for many years and new research shows the best returns from this strategy come from investing in smaller, value companies.

Ian Tonks, professor at the University of Exeter Business School and consultant to the Bank of England and a number of investment management groups said: 'Buying value stocks - those with a low Price over Earnings (P/E) - after a director has bought you typically get an abnormal return in the subsequent two years after the transaction.'

Based on director dealings in the years from 1986 to 2005, the researchers split companies into small value, large value, small glamour - high P/E stocks where the market expects above average growth - and large glamour growth stocks.

They found the strongest link between director dealings and share price outperformance was when directors of smaller, value companies bought their own shares. 

'Over 24 months, we found the returns on the small value group were 20% higher and the large value group also showed positively abnormal returns but not as much,' said Tonks.

‘Directors’ trades in large value stocks shows an outperformance of just over 6% over the control stocks over the same period,' he said.

The research showed a smaller and generally insignificant negative returns in the glamour stocks on the “sell” side.

Fellow researcher Alan Gregory said it is widely known that value stocks outperform glamour stocks over the long-term but said the research shows it is possible to get even better returns by watching what company directors (both executive and non-executive) do.

'You can do better than a basket of value stocks if you follow director dealings,' said Gregory - a member of the Competition Commission who advises HM Treasury and also advises fund management groups on investment strategies. 

8 comments so far. Why not have your say?

John Coles

Dec 15, 2009 at 09:32

A definition of "Glamour Stocks" would not have gone amiss.

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Dec 15, 2009 at 10:30

What the hell does that mean?

Maybe its covered with glitter

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Trevor Smith

Dec 15, 2009 at 10:38

Does anyone report on the purchasing (and selling) activity of company directors?

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Dec 15, 2009 at 10:44

yeah they do Trevor...its on all the sites.

One i use is

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Dec 15, 2009 at 17:17

Better advice than the article. maybe they should give you a job - can you do Glamour ???? :)

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Phillip Obe

Dec 15, 2009 at 19:02

Has the reshearcher consider the trading spread on the small companies might have account for the returns on these companies. The spreads are very large compare to larger companies hence the disparity in returns.

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Dec 15, 2009 at 19:22

Philip, I'm not sure about your argument. If the measure is mid-price to mid-price, then the size of the spread is irrelevant. On the other hand, if the measure takes account of the spread (i.e. offer to bid) a wider spread means that the share has to go up more than most just to reach breakeven. Therefore the percentage of outperformance quoted actually understates rather than overstates the reality.

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Phillip Obe

Dec 15, 2009 at 21:24


This research is over a period of 24 months and not one day price movement returns. If the midprice of a spread of say 10p is used the returrns is 5p on the bid. compare to a larger companies spread of less than half a penny. The returns over a preiod on mid price for large companies will be small. Hence my argument that a movement on small companies due to the spread will lead to a large returns. This will also depend on the amount invested.

The argument of the researhers is that the returns on small compnies is 20% compare to lager companies of 6%. This indicate to me that the larger spread result in higher returns on the mid price movement over time.

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