OT: Federal Legislators Beat The Stock Market

[Slinky]

Members of the House of Representatives considerably outperform the stock market in their personal investments, according to a new academic study.

Four university researchers examined 16,000 common stock transactions made by approximately 300 House representatives from 1985 to 2001, and found what they call "significant positive abnormal returns," with portfolios based on congressional trades beating the market by about 6 percent annually. ...

... A study of senators by the same team of researchers five years ago found members of the higher chamber even better at beating the market -- outperforming it by about 10 percent, an amount the academics said was "both economically large and statistically significant."

... "In the course of performing their normal duties, members of Congress have access to non-public information that could have a substantial impact on certain businesses, industries or the economy as a whole. If used as the basis for common stock transactions, such information could yield significant personal trading profits," they wrote. ...

... And representatives with the least seniority considerably outperformed those with more seniority.

Why would that be? The researchers suspect need had something to do with it. "The financial condition of a freshman Congressman is far more precarious" than a senior member's, they wrote. "House Members with the least seniority may have fewer opportunities to trade on privileged information, but they may be the most highly motivated to do so when the opportunities arise." ...

http://www.huffingtonpost.com/2011/05/2 ... 66387.html

[aguest]

Isn't that as evil as insider trading? Why should congressmen get away with it? HA Ha

[Slartybartfast]

.

[PST]

I've been pretty serious about procrastinating today, so I read the whole study. It can be found at http://www.bepress.com/bap/vol13/iss1/art4/ . You have to fill in a form to get it, but you don't have to pay.

The authors conclude that congressmen achieve better returns on their investments than ordinary folk because they use their power and inside knowledge. But that can't be true -- not if we believe the study. The only representatives who do better than average are the newest ones. As they get more seniority, with access to more power and inside knowledge, they actually get worse than the general public. This is so weird that I'm going to quote from page 14 of the study so you can see that I'm not making it up:

To examine the issue of seniority, we divide the House of Representatives into three approximately equal groups: those Members who have served three terms or less (up to six years service), those who have served four to eight terms (seven to 16 years) and those who have served more than eight terms (over 16 years). The results suggest that seniority has a substantial impact on portfolio returns. Stocks purchased by House Members with the most seniority show no indication of information advantage. In fact, on both an equal-weighted and trade-weighted basis, the calendar-time portfolios of the most senior Representatives actually underperformed the market. Portfolios of those Representatives serving between four and eight terms (the middle group) marginally outperformed the market, however not by enough to be statistically significant. By far, the most successful traders were those Representatives with the least seniority.

So let's get this straight. New congressmen are fantastic investors. In fact, it is only their superior performance that lifts the entire House well above average. After eight years, their skills desert them and their advantage is only marginal. A few more years and they do worse than the average man off the street. What happens? The authors' explanation is absurd. They say that after representatives gets a little seniority, they stop caring so much about money. Really? That's not human nature as I know it. Give a guy a little money and power and he's hungry for more. No, the answer must be that service in Congress rots the mind. It takes brains and energy to get there, and people with brains and energy are likely to invest more successfully than lazy dummies. So the newcomers trade like young Rockefellers, but year by year they sacrifice IQ points by remaining in Washington, and by the time they are senior enough to make committee chairmen they're carrying drool cups and relying on aides to tie their shoes. No wonder their investments tank.

Can we be sure of this explanation? Yes, due to another fascinating finding. If the study is actually measuring intelligence, not corruption, then Democrats should outperform Republicans. And that is exactly what the study concludes:

Furthermore, the nested test for significance of party affiliation indicates that the Democratic sample significantly outperformed the Republican sample. The Democratic sample beat the market by 73 basis points per month (nearly 9% annually) versus only 18 basis points per month (approximately 2% annually) for the Republican sample.

You can't argue with science!

[kempo]

Congress critters with seniority have a multi-million dollar retirement plus free healthcare. Many are already millionaires. If I were a congressman with say 30 years I would not be worried about money.

[chenpangpang]

Isn't that as evil as insider trading? Why should congressmen get away with it? HA Ha

Microsoft Office 2010
Microsoft Office 2007

[Slinky]

Hell, when you've got a GUARANTEED full salary retirement after two terms, you can relax a bit about figuring out where to invest and you can take more risks.