Congress vs The People
Why are Members of Congress so divorced from the real world?
Do our leaders have money in the markets? Do they know something we don’t? Yes, and Yes.
Insider Trading, Inside the Beltway
As a group, individual investors underperform the stock market by 1.5% per year. The more they trade, the worse they perform, so that heavy traders underperform the market by 5.5%.
Three groups routinely beat the markets.
- Convicted Criminals: People arrested for insider trading.
- Corporate Insiders: the leaders of large corporations beat the market by 5%
- Our Elected Representatives: Members of the House by 6%, and Senators by 10%
Bipartisan Agreement
There is bipartisan agreement when it comes to investing in the companies you legislate: both Democrats and Republicans beat the markets.
The outperformance of US legislators has been confirmed numerous times. Prof. Gregory Boller found in 1995 that 25% of the members sampled “showed stock transactions that directly coincided with legislative activity.”
In 2004, Prof. Alan Ziobrowski showed that stocks bought by Senators beat the market by 10%, and stocks sold by Senators lagged the market by 2%.
In 2010, Wall Street Journal columnist Jason Zweig reported that 72 congressional aides had outsize returns similar to their masters. Few were even chastised.
Prof. Ziobrowski’s current, 2011 article focuses on the House of Representatives, measuring abnormal returns for more than 16,000 common stock transactions made by approximately 300 House delegates from 1985 to 2001. He found that members of the House beat the markets by 6% on average.
Is this illegal?
Amazingly, it isn’t. Neither the House nor the Senate ethics manuals restrict stock trading by their members, and Congress has never passed legislation forbidding its members or their aides from insider trading.
Can we copy their moves?
If we could, we certainly should. Individual investors often have a tough time comprehending the impact of even a 1% improvement in investment performance over long periods of time, let alone 6% or 10%, but the impact is massive.
The 112th Congress
In the current, 112th Congress, the average tenure for a Member of the House is 9.8 years, and for a Senator it is 11.4 years. Hawaiian Dan Inouye has been a Senator for 48 years. Let’s look at the difference over 10 and 20 years for a few different investors.
The average returns for the last 20, 50, and 80 years have been within less than 1% in every equity asset class, showcasing capitalism’s consistency in creating wealth over time.
To keep things feeling relevant, we will use returns over the last 20 years, subtracting 2.5% for inflation during that period.
I’ve thrown in an asset class I write about often, US Small-Value, because a small-value tilt is the only legal way to beat the markets, albeit with a different risk profile. Changing your investment strategy is also easier than getting elected to Congress.
Average Investor vs Elected Leader: 20 Years of Returns
Can’t Copy Congress
Unfortunately, trading history for Members of Congress is only available annually, making portfolio replication impossible. Strategies for copying the trades of corporate insiders have proved elusive.
There are 16,000 insider trades reported to the SEC each month, and no strategy for parsing them has consistently made anyone money. Perhaps I’ll write a future article on why that is, but in the meantime don’t buy any books that purport to reveal a method for profiting on the trades of corporate insiders.
What to do?
For most people, their 40s and 50s are prime earning years. If you are 40, your average life expectancy is 43 more years. You will be in the market a long, long time.
Winning a House seat costs an average of $1.4 million. The Senate is steeper at $9 million. If you’re a rich masochist, then your investment strategy could include a move to Washington.
For capitalists without political ambition, we prefer an approach that combine high-yield fixed income, which doesn’t depend on guessing what Congress will do next, together with opportunistic exposure to markets for a smaller fraction of a portfolio.
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Further Reading:
- Next Blog Entry: Steak or Sizzle? Commodities and Your Portfolio
- Our Approach – Learn about working with Brendan
- Wanna Bet? - Legal ways to beat the S&P 500