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Why you should pay attention when management buy (or sell) ASX shares

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I think that it’s important that investors pay close attention to when management of a business decide to buy or sell their ASX shares. 

Why it matters

The leadership of a business are the ones that should be most committed to the cause. At least, that’s how I think it should be.

If people decide that they want to sell their shares, that can raise some questions.

But if the management want to buy shares, then that could be a really good indicator of the positive outlook for the company. The idea is that management only buy shares for one reason: they think the share price represents good long-term value.

I like to see management buy shares a similar price to what regular investors can buy shares at on the market.

Insiders have the best knowledge of a company’s operations. They are the management of the company. Or perhaps it’s directors buying who have excellent knowledge of the business and know the management closely.

I’d actually prefer to see more management buy shares more often. It would be a fair defence to say they shouldn’t have all of their financial eggs in one basket, but I think management should show a commitment to the business they’re leading. Putting your own money on the line is one of the best ways to align yourselves with the people that you’re supposedly running the company for.

Here are some recent positive management movements:

I’ve been pleased to see pretty hefty purchases of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares by the Millners.

Geoff Wilson has been buying up shares of WAM Global Limited (ASX: WGB) and Wam Alternative Assets Ltd (ASX: WMA).

There have been some insider buys of Transurban Group (ASX: TCL) shares and Nanosonics Ltd (ASX: NAN) shares.

Sales can be a worry

There are lots of different reasons why management apparently choose to sell their shares.

Selling to pay tax is a common reason. Diversifying their portfolio could be a reason. Maybe they need the money to buy a property. Divorce can be a reason.

An ASX share sale can worry investors because it could mean management are deciding to cash out before some bad news is coming.

There have sadly been plenty of examples where management sell and then, a few months later, some bad news is announced. It’s not necessarily illegal, it’s just not a good look and shareholders may lose confidence in management. A company will sometimes go through tough times, that’s understandable, but management shouldn’t be bailing out just before the bad news.

But a sale doesn’t always mean poor performance

There have been some sales by ‘insiders’ in recent times in businesses that have gone on to keep growing profit and the share price. A share sale may simply be an honest attempt to diversify.

The leadership of Afterpay Ltd (ASX: APT) and Kogan.com Ltd (ASX: KGN) have previously sold a portion of their shares at a much lower price than today’s share prices.

There was a big selldown of Pushpay Holdings Ltd (ASX: PPH) shares not too long ago, but now the Pushpay share price is close to trading at its all-time high.

With the above sales, investors didn’t need to worry long-term, partly due to COVID-19 bringing forward digital adoption. 

Foolish takeaway

If you’re invested in ASX shares, you want to see that management have skin in the game. Either with a large existing holding or they are purchasing new shares on the market.

Be wary of sales. A sell won’t always mean bad news is coming, but I wouldn’t exactly call it a positive. However, if a business does drop then it could be good value to buy – that’s why I think about the A2 Milk share price. I reckon A2 Milk is a good long-term buy today.

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Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd, Nanosonics Limited, and PUSHPAY FPO NZX. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and Transurban Group. The Motley Fool Australia has recommended Kogan.com ltd, Nanosonics Limited, and PUSHPAY FPO NZX. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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