David Prosser's Outlook: A reason to buy, but not to sell

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The Independent Online

If a company's directors don't have sufficient confidence to hold on to its shares, why should investors? Directors' dealings are widely followed both in the City and amongst private investors for good reason – it seems perfectly logical that directors with the inside track on their companies' performance are likely to make sensible decisions about share sales and purchases.

Yet some new analysis from Deutsche Bank, which has for more than a year been monitoring directors' dealings at more than 500 companies across the European Union, suggests that investing on the basis of this information is likely to produce mixed results.

Deutsche found that purchases of shares in their own companies by directors might well be a useful buy signal for investors. On average, over the past year, companies reporting such purchases tended to outperform in subsequent months, with their shares outstripping both the wider sector and country indices.

Intriguingly, however, the same signal is not apparent from sales. When directors sold their companies' stock, there was no sign of the subsequent underperformance from the share price that one might expect.

The German bank offers no explanation for why this should be the case, though it's fair to point out that there are all sorts of motives underpinning the decisions by directors to buy or sell their own shares. Still, it seems odd that one type of transaction should seemingly give such a strong signal when another does not.

The answer may be that company directors are no more astute than the rest of us when it comes to selling out of positions. You have been warned.

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