Only follow directors if they’re women

If you are going to base your investment decisions on the trading patterns of company directors, make sure they're women, says Tim Bennett

Many investors are lazy; they look for a simple system that will tell them when to buy and sell stocks. One of the most obvious is to follow the trading patterns of the people who should know the most about a firm its directors. As The Economist's Buttonwood blog notes, this is a mistake. But not for the usual reasons cited that directors may trade in special circumstances, selling to settle a divorce or fund a house purchase. No, it's because most company directors are men.

A University of Exeter Business School study recently analysed 80,000 trades in the British stock market. It found that in the 20 days after male directors bought shares, the price rose by an average 0.88%. But when female directors bought, the gain was 1.55%. Extend the post-purchase period to a year, and men managed a gain of just 0.37% versus 0.68% following trades by female directors. Here's why.

Men, who by far outnumber women on company boards, trade an average of 45% more often than their female counterparts. Single men are far worse, trading 67% more often. Thanks to trading charges and taxes, that's enough to cut their performance by 1% a year if they are married and 1.44% a year if they are bachelors. Indeed, so bad are male company directors as traders, that their sells tend on average to outperform their buys over a one-year time horizon.

There are two simple messages here. Firstly, avoid over-trading. And secondly, do your own homework on whether shares are a buy or sell or if you must follow directors blindly, stick with the female ones, because they're better at it.

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