signs of when to buy.

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    When directors buy or sell
    Trading of their shares by a company's principals can indicate the state of play,
    November 29, 2003

    IT could generally be considered a sign of confidence when a director of a company buys its shares. The opposite conclusion would be drawn if a director who owned shares in a company in which he served started selling them - as was the case with failed insurance giant HIH. After all, no one knows better than its directors how a company is travelling.

    While you probably wouldn't want to rely on this as the only measure for buying or selling shares there is good evidence that the buying and selling activities of directors is an indicator of company performance.

    A company operating under the intriguing name of the Inside Trader tracks such movements for every company listed on the ASX, and it concludes that more than 80 per cent of stocks do increase in the medium term (three to 12 months) after significant buying (or continued buying) by directors. The reverse is also true when directors are selling.

    The Inside Trader compiles each week - for a fee - a report on changes in directors' holdings which shows the buying and selling activities of directors in their own companies.

    The report examines every change of interest notice lodged by a company with the ASX, determining whether it is a genuine trade or an options play etc. This is work that investors can do themselves for nothing but it would require a fair amount of digging around for the information on every company.

    Inside Trader principal Keith Neilsen says the information is only a research tool to help investors. It combines its findings from the change of directors' holdings report with an examination of stockbroker analyst reports. The idea is that if 10 analysts all put a buy recommendation on a stock there is a good chance it will improve in performance. It's even better if directors in the company are also buying.

    "We are not looking for insider trading in the legal sense but we may pick up some," says Neilsen. "Large or continued buying is a good indicator that the company is perceived to be undervalued by someone close to the company and vice versa."

    To give some examples, in December 2002 and July 2003 two directors of Mount Burgess Mining purchased more than 670,000 shares at between 7.1c and 9.1c a share.

    In late August 2003 the share price started to rise, reaching 17c in mid-October. Another is Salmat, where from the end of March to the end of May 2003 two directors bought about $190,000 of a stock that had basically been trading sideways for six months. Within five months of them buying below $2, and within 3c of their low for the year, the shares reached a maximum value of $3.50.

    On the sell side, in July and August 2002 two directors of consumer company Atlas Pacific sold more than 300,000 company shares between 49c and 42c. The shares have been on a downward slide since, currently trading at 22c.

    Of course, there are many reasons why directors may sell shares in their company - an obvious one being they need the money. They are quite free to buy or sell so long as they don't breach their own company rules and they must declare it to the ASX.

    The Corporations and Markets Advisory Committee - which makes recommendations to the Government on legal matters as they relate to financial markets - must also think there's a link between directors' buying or selling and company performance.

    In its recently released Insider Trading Report, CAMAC made 38 recommendations aimed at strengthening aspects of the law and related disclosure requirements. At present, the Corporations Law requires directors to notify the ASX of trading in their own securities within 14 business days.

    This is to help keep the market fully informed, while reducing the opportunity for directors to engage in insider trading in those securities without detection.

    CAMAC wants the disclosure obligation to include senior executives as well as directors and the disclosure period reduced to two business days to ensure that the market is promptly, as well as fully, informed.

    A further recommendation was that corporate officers who resign should be obliged to disclose any transactions they undertake in their company's securities before resigning and any such transactions they undertake within one month after they resign.

    Reducing the notification period to two business days makes great sense, not least because this would be closer in line with the ASX listing rules requirement to notify the ASX within five days of any change of interest in a director's holding.

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