Wanna Make Money in Stocks? Try the U.S. Senate Hedge Fund
Forget
Jim Cramer, if you want true market-beating results get yourself elected to Congress. That’s the takeaway of a new
study by academic experts on the investment habits of U.S. Representatives and Senators.
The study shows conclusively that your elected public servants earn “abnormal returns” that top even hedge fund results. How do they do it: Inside information.
Amazingly, there are no ethical guidelines or barriers to members of Congress investing in the very companies they directly regulate. Nor are there any prohibitions against using the inside information they do obtain by formal or informal means. You know, informal, like a casual word dropped by a lobbyist. According to
Integrity Research Associates, while House rules prohibit members of Congress from “using their official positions for private profit” and state that “they may not use confidential information obtained in the performance of their government duties for personal gain,” the rules
also defend unrestricted stock trading on the ground that restrictions
might impair House Members from effectively representing their constituencies [italics mine].
Representatives are uncannily savvy investors, outperforming the market by 6 percent per year. But
Senators are the true champions on Wall Street, beating the market by 12 percent per year, year after year. Study co-author Alan J. Ziobrowski, associate professor of business at Georgia State University told the
New York Times two weeks ago “it’s just not rational to assume they are just plain lucky.”
Ziobrowski concludes that Senators outperform Representatives because they belong to a more exclusive club and they have deeper pockets, and wield more power and have longer tenures than do Representatives. One finding of the study implies that the Senators know they are ethical outlaws; a finding that may explain why over time their trading edge diminishes. “At some point it could be that the risk isn’t worth the return, if you know what I mean,” said Ziobrowski.
It’s Insider Trading and It Ought to be Illegal
Ziobrowski and co-authors Brigitte Ziobrowski (Augusta State), James W. Boyd (Lindenwood University) and Ping Cheng (Florida Atlantic University) didn’t mince words as to causation of the aberrant profits. “We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain,” they concluded.
Senators routinely beat corporate insiders and hedge fund managers, giving new meaning to the phrase “feeding at the public trough.” But hey, it’s not illegal, and is likely never to become so given that members of Congress are the guardians of the trough. All this should give rise to a new credo for these shrewd free-marketeers: “Congress—it works for us.”
This perk of office—insider trading—serves as a real hedge against the vagaries of electoral fortune. After a hard term voting according to whatever pledges were signed on the campaign trail, and whatever campaign contributors stipulate, at least a hard-working member of Congress can go home at the end of the term knowing he or she has been enriched in ways that only the most privileged 535 American investors can be.
Curiously, since the study appeared in May no members of Congress have gone on the record with a comment. Even the New York Times had to settle for comments from Nick Lampson, an ex-member of the House, who, coincidently, did
not invest in stocks as a member of the House.
I share the recommendation of the study that “timely and complete reporting of congressional security transactions” should become law, but I would go further. Given that they can’t keep their minds on their legislative duties well enough to do things like pass budgets and raise the debt ceiling on their own spending, I recommend blind trusts of the variety that the President must create. Such a requirement might also serve to dissuade those with outsize financial appetites from even running for office.
Aside from that option, I suggest we use a timely and complete data base of Senate stock purchases and holdings to create a U.S. Senate Index. The index would be available to all through reputable mutual fund firms like Vanguard. What? That would diminish the value of the index itself? What a shame.
The Ziobrowski study was first undertaken in 2004. It examined the investing habits of Senators. The 2011 study entitled "Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives,"
Business and Politics: Vol. 13: Issue. 1, Article 4., allows for the comparison between House and Senate outcomes. This study examined 6,000 stock transactions made by approximately 300 House members from 1985 to 2001. A previous study by Gregory Boller in 1995 showed that stock transactions coincided with legislative activity. The 2004 Senate study, “Abnormal Returns From the Common Stock Investments of the U.S. Senate,” can be found
here.
