Last month the news came out that the directors of TFG had decided the company should borrow R1bn to buy back shares. They paid about R100 a share. Shares that are, as I write, trading at just above R50. So, the board managed to effectively light half a billion rand of shareholder money (well, a loan taken on behalf of shareholders) on fire.
Sure, maybe the share will recover. But for now shareholders are paying interest on that R1bn, and directors have again proved an important point. That is, director dealings are worthless as an indicator of anything. There is one exception. An entire board (or most of them) selling all their shares (or most of them) are like rats jumping off a sinking ship, and the best response is to also sell.
Other than everybody fleeing, directors selling is meaningless. They usually receive some level of pay in the form of shares and so are net sellers. While parts of the market put a lot of significance on director sales, research shows that it has zero impact. The three key research projects on the topic (Seyhun, 1986; Lakonishok & Lee, 1998; and Jeng, Metrick & Zeckhauser, 2003) all showed the same thing: director sales were zero indication of share price movement.
This makes sense. Directors have a skill set — in the case of TFG, selling clothing and other fashion accessories. Valuing a company, even one they work at, is not one of those skills. We know this.
Valuing a company is immensely hard; that is why we have a vast global industry set up to do just this. They’re all trying to beat the market and few succeed in their one aim: market outperformance. So why would a director (or a board), without the stock-valuing skill set, be better than an entire industry?
Director sales are all about diversification, tax and liquidity needs. They have little to do with value. We have some examples of directors selling high and looking smart (yes, Transaction Capital). But I remember howls when Capitec directors sold at prices well over 50% lower than current levels.
Director buying is different. This is their own hard-earned money they are putting to work in a stock they probably already own shares in. But even here the above-mentioned research reported little outperformance based on director purchases, and certainly not enough to reliably profit from.
Local research by Moonilal, Sebastian and Schwenke, published in February in the South African Journal of Business Management, looked into 90 JSE-listed firms, 582 Sens announcements and 1,202 dealings during 2022/2023. Sales showed no significant price reaction, while purchases actually showed a slight but largely insignificant negative return.
So, some market watchers get very excited about share dealings by directors, and it makes for great social media posts about insiders throwing investors under the bus. But the truth is simple: aside from every director selling all at once, ignore director dealings.
