In recent elections (both in the US and UK) the betting markets have been a more accurate guide than the polls. There’s an important lesson here for investors looking for shares to buy.
Not obviously connected, what company insiders are doing with their holdings in the businesses they run is a valuable bit of information. And I think it’s easy to overlook this. I’ll explain the link between those two points later.
Stocks and elections
Anyone who wanted to predict the result of either the US or the UK elections this year would have done well to look at bets being placed. You see bookies seemed to be more on the ball than pollsters were.
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There are a few reasons for this. But the most straightforward is that what people do is usually a better indication of what they think than what they say.
People who place bets on the outcome of an election put their own money at stake. That means they have zero incentive to back anything other than what they think is going to happen.
That’s where the link to the stock market comes in. Company directors sometimes use their own money to buy shares in the businesses they run. And when they do, it can be a strong positive sign.
Executives are typically in a position to know their own firm better than anyone else. But they have almost no incentive to invest in its shares unless they think doing so is a good idea.
This year’s elections have shown me that commentators ought to pay more attention to the betting markets. And I think something similar might be true of investors with insider buying.
A FTSE 100 example
Vistry (LSE:VTY) is a good example. The company is in a really complicated position at the moment, with its share price having fallen 45% in the last six months.
There are a number of reasons for this. These include the Budget increasing stamp duty, an investigation into anti-competitive practices, and costing errors in one of its divisions.
All of those are risks, but there are also reasons for positivity. As well as the stock being much cheaper than it was, the government aims to build more homes, and interest rates are falling.
The job for investors is to figure out what the price of Vistry shares should be, given these risks and opportunities. And that’s a real challenge.
One thing to note though, is that US investment firm Browning West bought £3.7m in shares this month. Its Chief Investment Officer is Usman Nabi – a non-executive director at Vistry.
There are a number of reasons why this might have happened. But I can’t think of any that don’t involve some sort of positive view on Vistry’s prospects from a company insider.
Think carefully
The Vistry share price is already lower than it was when Browning West made its investment. By itself, that’s enough to show that nobody should buy any stock just because someone else is.
Nonetheless, directors buying shares in a company can be very positive. It’s one data point among many, but the recent elections have got me thinking it shouldn’t be underestimated.
