Until recently, your Money Morning emails contained a section at the bottom of the email called ‘Directors Dealings.’ It had no editorial and no comments. All it contained was a select list of company directors that had either bought or sold shares in their own company.
In mid January your editor decided to get rid of that section. For two reasons – one reason was that although it was only a small section, it was the most time consuming to produce. But secondly, our gut instinct was that the information by itself was irrelevant.
I’ll explain what I mean shortly.
For years everyone knew that insider trading was rampant. That a select few individuals within a company, or connected to a company had access to information that no-one else did.
These individuals were able to use that knowledge to buy and sell shares in listed companies for massive profits. Or in the case of Rene Rivkin and Qantas, for about $2,500.
So, in order to make the stock market a level playing field, insider trading was outlawed, and companies put restrictions on when their directors could buy and sell shares. Inevitably this means that directors shouldn’t transact for certain periods surrounding reporting dates, or if they are in possession of sensitive information.
But aside from that, a new phenomenon grew. That of executive compensation agreements. In the good old days, company executives would get paid a normal salary, much like you get paid a salary. On top of that, they may get paid a bonus if the company performs better than expected, or even if it met specific revenue or profit targets.
Of course, if those targets were met it was of benefit to shareholders, as share prices are largely driven by profit expectations.
However, for company directors, they felt as though they were missing out on some of the action. “Why should the shareholders get all the benefit when they haven’t done anything? It’s the directors and the employees that have put in all the effort.”
Hence the growth of employee share schemes, and more importantly executive compensation packages. Over the last twenty years they have changed considerably. The dot-com boom having been a big mover in this field, especially with employee stock options.
Each time a new way of rewarding management is invented it is claimed to be the ultimate synergy between executive pay and shareholder reward. Then things go pear-shaped and it is realized there is no synergy at all as shareholders get screwed while the directors still get to cash in their chips.
So, what does that have to do with us getting rid of the Directors Dealings section in Money Morning?
For a start, take a look at the annual report of any company. Before you even get to see the financials of how the company has performed, you have to sift through pages and pages of details on what shares the directors and executives own, and what options they hold over the stock.
Of course, this is important information to know. But, in terms of you basing your investment decisions on whether to buy, hold or sell because a director has bought, held or sold, does it make a difference?
I would argue that it doesn’t. Let’s take a quick and very random look at some of the Directors Dealings that we recorded in Money Morning between August 2008 and January 2009. You may, or may not be surprised by the results…
Remember, it’s only a snapshot. But I doubt whether a fuller analysis of how directors fair with their buys and sells would unearth a different outcome.
The reason why directors have done so poorly with their share investments in their own company is simple. It isn’t really their own money they are investing. Sure, they would rather see the share price go up, but think about it this way…
The company is paying the executives $X, which is then paid back to the company in return for receiving the shares. It’s just a book entry for the company shuffling dollars and shares around internally.
For the director, it’s a win-win situation. If they shares go up then he/she is getting money for nothing, if they go down then he/she is still a winner because they didn’t invest any real money to start with.
The table above is a perfect example of why you should not take any notice of when a company director buys shares, because unlike you, they don’t have any real ’skin’ in the game. And even when they sell shares they aren’t getting it 100% correct as the example with Pure Energy shows.
In a nutshell, there are thousands or even millions of signals to look at when you decide to make an investment. Looking at the Directors Dealings should be one of the last things you look at before you tell your broker to buy or sell.
Other Stuff on the Markets
The G20 finance ministers met in London over the weekend to try and ’solve’ the problems in the financial markets. The result? More public money going on another publicly funded black hole – the IMF.