Insider transactions 5 comments

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I define insiders broadly here as directors or sunstantial shareholders (>5%) of the company who have to announce any personal purchase/sales of company shares to SGX.

Not all directors and substantial shareholders are equal, and not all insider purchases/sales lead to the same conclusion. We have to look at the nature of the insider, as well as the magnitude of the transaction.

I often view transactions by directors as the most important. They are the true insiders, with good helicopter view of group operations and business outlook. In particular, if the CEO or managing director is selling a big chunk of his shares, that is a danger sign. The case might not be as strong for independent/non-executive directors (but watch out if two or more of these start quitting the board!).

Substantial shareholder transactions might be viewed with less importance, especially if they are not board directors. Funds frequently turn over their portfolio and although they often sell when they perceive company fundamentals to be turning down, the investor who knows his local terrain (ie. watches the local market) probably has little information disadvantage in comparison with these institutions, and should perhaps think twice and do further checks before following the actions of these funds. One class of substantial shareholders whose transactions are, on the other hand, sometimes more important than directors', are what I would call strategic shareholders. These are either industry insiders (eg. Koh Boon Hwee in the electronics industry, Sam Goi for food industry) or institutions which could generate business for these companies (eg. Temasek, Isthimar for Hyflux). That strategic stakes are being taken in the company often suggests new synergy and contacts being established, with possible contracts on the way.

As for size of transactions, I would think that any transaction below a half to one million dollar-volume transaction is probably not worth tracking, unless the company is such a micro-cap company, in which case the company is not worth tracking anyway (in my view). Another rule of thumb is by comparing the transaction size (usually purchase) with the individual's annual earnings. If he earns say, $250k a year, and he buys up $200k worth of company stocks on the market, then that does show some confidence in the company on his part.

Finally, borrowing an idea from Peter Lynch, insider share purchases are much more important than share sales. The latter might sometimes be undertaken to finance personal spending. After all, these people have to cash out at some point (but usually in drivels if the purpose is for the abovestated). On the other hand, why would one buy an asset unless he thinks it would make money for him in the future?