Buffett, and why you need to eat with management

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Welcome to the Supernatural Stocks podcast on Moneyweb, with your host The Finance Ghost – your weekly fix of local and international insights for investors and traders.

It’s a new year. It’s possibly a new you, depending on how you feel about these things – and happy new year to you!

It’s certainly a new era at Berkshire Hathaway, with Warren Buffett having officially retired from the top job and handed the reins to Greg Abel.

Over the past 12 months, Berkshire’s share price increased nearly 12% and the S&P 500 was good for 16.5%. But of course the Buffett approach demands that we apply a longer-term lens to the performance. Over five years, Berkshire is up 117% and the S&P 500 has done 82% – so even a medium-term lens is firmly in their favour. Not bad at all for the twilight of Buffett’s career!

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Buffett will remain involved as chair of the board. I also somehow doubt that his office at the headquarters in Omaha will get cobwebs from lack of use, as he plans to spend considerable time there. As such an iconic figure, the business he built is intertwined with his life.

That’s the kind of management alignment that investors love seeing.

Any ‘Buffetts’ in SA?

Although there are a handful of companies on the local market that feature highly involved and deeply invested founders who are still active on the board, these companies are thin on the ground.

South Africa hasn’t exactly been a hotbed of innovation and entrepreneurship since the global financial crisis, so we have missed out on the new listings boom powered by the global tech sector over the past 10 to 15 years.

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Where companies have been built and sold over that period, it’s generally been in the private sector where private equity investors are highly active. This unfortunately doesn’t do any favours for our opportunity set as retail investors.

This means that there’s a lot of ‘old money’ on the JSE rather than ‘new money’ – and that old money tends to be managed by custodians of capital rather than outright builders of businesses.

That’s not necessarily a bad thing. It just means that you need to be very careful that the management team is eating with you, not taking the food from you.

With expectations of a strong year for the local market and plenty of money flowing into South Africa thanks to the favourable gold and PGM [platinum group metals] prices, it’s likely that there will be wealth creation on the JSE.

But for whom? And how can we judge the behaviour of directors and assess that as part of our investment process?

Disclosure rules exist for a reason

Director dealings announcements come through thick and fast on Sens. In a quieter period of other company news, like in the run-up to Christmas for example, these announcements become even more stark.

The disclosure requirement is very important and is taken seriously. You may recall that the former CEO of Bytes Technology resigned after it became apparent that there were a shocking number of undisclosed dealings in the company’s shares.

My view is that the JSE needs to have much sharper teeth with disclosure shortcomings, but at least it isn’t something that directors can simply ignore.

The disclosure rules also go beyond just the directors of the listed company board. When directors of major subsidiaries trade in shares, it gets disclosed. Depending on company policies, there are also disclosures when senior executives trade. Another very important element of the disclosure is that it includes associates, for example spouses or other legal entities that the director is involved in.

These rules wouldn’t be there if it wasn’t important to consider the behaviour of directors in the context of your investment.

Despite this, time and again on X I’ve had people shouting at me because I’ve pointed out worrying sales by directors of companies.

“Why can’t this person sell?”

“They are also allowed to be rich!”

“I see nothing wrong here!”

Sure. And most of the time, that’s absolutely right.

But there is also useful information that comes from director dealings announcements. In the same way that you wouldn’t ignore financial results, you also shouldn’t ignore these updates.

But how do you spot the potentially problematic dealings, or the good news, versus the non-events?

Share purchases: A great sign, possibly

There’s an old adage in the market that goes roughly like this:

‘Directors may sell shares for many reasons, but they only buy them for one reason.’

And that reason is because they are undervalued – at least in the opinion of the director involved. This means that investors tend to pay more attention to purchases rather than sales, particularly the timing of the purchase in the context of everything else that the company is busy with.

Of course, there are different types of purchases. If a director receives share-based payments based on share options or other structures, it will show as a purchase. But simply receiving shares as part of your remuneration package is very different to actually taking cash from somewhere else and buying more shares for yourself.

Think about the concentration risk. For an executive director, the company in question is their source of income. It’s also where the share options sit, so there’s already exposure to the share price.

A decision to go even deeper by buying more shares is a very positive step to take and one that you’ll rarely see.

When you do see it, it’s worth paying attention to, as the director is going beyond the concentration risk to say: “Yes, I really want more shares!”

Let’s deal with another nuance now that deals with share-based compensation. When a director covers the tax out of other cash they have and therefore retains the full award – in other words, they don’t sell shares to cover the tax – that counts as a purchase in my books. It’s no different to taking cash and just buying shares on the market. I’ll deal with that more in the selling section.

Something else that matters when you see purchases is the quantum, along with the identity of the director in question.

There’s a big difference between the CEO putting millions of rands into shares and a director of a major subsidiary throwing R20k into shares.

Sure, it’s still money, but what do you care more about – the top dog buying tons of shares, or someone further down the structure putting a small amount in?

Typically, the CEO and CFO would be the most useful sources of purchases from an information quality perspective.

Also be careful where companies have minimum shareholding requirements.

This is a great company policy and frankly it should be in place across the board to create more alignment, but it also means that purchases by a recently appointed executive might be nothing more than a compliance purchase to reach the agreed minimum shareholding level. This limits the usefulness to investors of the timing of the purchase.

Here’s another nuance: where a director is the appointed representative of an institutional investor, then the purchases might be much larger than you would otherwise see from an individual director. Although it’s good news when professional investors buy more shares, be careful of putting too much importance on that quantum. These numbers aren’t comparable to normal purchases.

So purchases can be really good news, especially when they involve top execs buying shares outside of any minimum shareholding requirements or share-based compensation arrangements. That’s the highest quality purchase.

And if you think that’s complicated, just wait for share sales!

Share sales: Something big, or nothing …

Sales are more complicated to interpret than purchases.

I’ll start with the trade that I personally ignore every time: sales to cover the tax on share-based awards – something I alluded to earlier.

When a director or senior executive receives share-based payments, there is a taxable portion. Inevitably, that portion is 45% due to the high nature of director earnings. The market norm is for that portion of the share award to be sold to cover the tax. There is no information quality in this type of trade. It tells you nothing about the share price.

As noted earlier, where the full award is retained and the director covers the tax with other cash, then it counts as a purchase in my books.

But what about the opposite, when the full award is sold – ie, not just the taxable portion?

In that case, I certainly see it as a sale by the director that is worth noting.

After all, if you received these shares for nothing and the first thing you thought to do was to sell them, that’s hardly a bullish signal to the market.

Then we get to sales outside of the share-based compensation cycle. These are just normal sales on the market. If they happen from time to time without much associated news from the company or major share price movements, then they are probably not useful.

But if there’s a clear pattern, either a top director selling continuously or several directors all selling at the same time, then your ears need to prick up.

Has the share price had a strong recent rally? If so, the directors are sending you a message that the rally might be overdone.

Are the directors saying one thing and doing another, for example executing share buybacks based on an ‘undervalued’ share price and then casually selling their own shares into that buyback process? Or did they recently give flashy forecasts and big promises, all before selling?

The context matters tremendously.

Another important thing to keep in mind is the total value of the shareholding before and after the sale.

There’s a big difference between a director selling all of their shares or a big portion of their shares versus a small portion of their shares. This is where you need to be careful with the quantum. It can look like a really big number, but for a director with a vast shareholding, it might be a small portion of what they hold.

Complicated, but worth it

In summary, most of the time, director dealings aren’t helpful. Sales are less likely to be helpful than purchases.

But it’s a bit like having access to oxygen: you don’t notice the problem until it’s too late.

Monitoring director dealings is a worthwhile process when you’re looking at either investing in a company or reducing exposure.

Look at what the management team is doing.

In 2026, I plan to keep doing exactly that: looking at director dealings and figuring out what they might tell us about the company.

Welcome to a new year of investing. I look forward to walking this road with you!

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