Directors make money by buying close to home

FOR as long as I remember, one of the big unanswered questions in stockmarket investing has been whether directors of listed companies who buy their own shares do better than the rest of us.

Deductively, you'd have to say they must do well. After all, they are the insiders.

Now we've got an answer. Keith Nielsen operates a website called www.theinsidetrader.com.au and for years he's been tracking directors' trades. Recently, he had the sense to spend money on research to examine the area.

After monitoring 6000 trades over the past four years, the results are out - and they are compelling. Six times out of 10, when directors buy their own stock, they make money - and on average those returns are double the market return for the year.

The smaller the company, the more likely the directors are to make huge returns. Again, it makes sense, because in small companies the directors can have a thorough understanding of operations. We're not talking about inside trading: this is all above-board, "on market" activity common in every listed company.

Nielsen focuses exclusively on situations in which directors actually spent cash buying shares. He ignores all the other variations by which directors pick up shares, such as stock options and share plans. In other words, he only includes trades where the directors put their hand in their wallets.

And sometimes, when people win, they win big. The largest gain made over the past four years was, ahem, 49,976% made by John Borshoff, of the uranium miner Paladin Energy. He bought 633,330 shares for 1.3 cents each. When the report was signed off for the 12 months to September this year, Paladin shares were $6.77 and Borshoff's $8229 had turned into $4.2 million.

Of course, not every director makes money on every trade. When directors lose, they lose on average 34%.

But mostly they make money. One of the best directors' dealings I have seen reported this year came last Monday, when James Hodgkinson - a director of property trust Goodman and an executive director of Macquarie Bank - put a buy order into the market for Goodman. (This was the day Goodman's rival, property trust Centro, collapsed.) Hodgkinson put down half a million dollars worth of Goodman stock at $4.37; they closed for the weekend at $4.90.



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