Steve Klingaman

Steve Klingaman
Location
Minneapolis, Minnesota,
Birthday
January 01
Title
Consultant/Writer
Bio
Steve Klingaman is a nonprofit development consultant and nonfiction writer specializing in personal finance and public policy. His music reviews can be found at minor7th.com.

Editor’s Pick
JULY 21, 2011 8:31AM

Wanna Make Money in Stocks? Try the U.S. Senate Hedge Fund

Rate: 18 Flag

wall-st-bull

Apparently it’s one long bull run for members of Congress.

Image:  washingtonindependent.com 

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.

            

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Comments

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Gratifying to know that voters have had the wisdom to elect the nation's most astute investors to high office.
Are you trying to imply that politicians would use their positions to feather their nests? further their own ends? line their pockets? slurp at the trough? get fat at public expense?

Naw...... g'way, yer kiddin' us, right?

I guess the term "land of the free" means something different to these representatives & senators........

........and how often does a President come from among this bunch? Does anyone really believe that someone who comes up through this 'system' of deceit and cheating and lies can suddenly put on a halo and become "our sainted saviour, the President"?

What, I wonder, are the other two "impossible things" you believe before breakfast?

.
And I thought things were a mess because we had enough people who didn't understand money. Clearly they know personal investing, just not investing for a nation's future. Good piece.
They should probably be required to hold only the Market portfolio as to weights, or, issue a prospectus.
I am going to do well under these contingencies. There are people right now in the budget negotiations for example who are short, and leveraged, against Treasuries and the dollar, which is not a good idea, hence the Market Portfolio being the better incentive, since then, they do well only if all investing classes do well.
Good piece again.
America has become divided over the bottom line alright.
I had absolutely no idea this was going on. If it isn't insider trading, then truly that term has no meaning.

Can our opinion of Congress possibly go any lower? Oh yes. It can.
Jeanette, yes it can, and just did. For me at least. You have to say, it represents a remarkable dedication to conflict of interest over good government by any definition. And the party in power always does slightly better in its returns, reinforcing the direct link between power and advantage.
Well...we know it's not because they're smart and know how to handle money and budgets.
Not surprised a bit.
While your opinion of them has dropped from this, mine was just affirmed.
A key reason to disallow this is to diminish the effect which is already rampant where they think it's “easy” to do various things out in the real world. Easy to save. Easy to invest. Easy to get paid enough. Easy to get good health care. Easy to get justice in court. I remember a few years back hearing one of them refer to families making $250K as “middle class” and if they really think that, no wonder they think people are getting by just fine. They're so insulated from reality it's no wonder we get bad law a lot.
The stock market is the world's largest casino. The average investor has no idea how rigged the system is.
My guess is if they broke out regulated industries--healthcare, financial institutions--the results would be even more stark.

r
No wonder so many losers-I mean "Dedicated Public Servants"-run for every congressional seat up for election. Seriously, we should require disclosure of investments; We would learn who was shorting the United States.
Plutocrats do as plutocrats does. Of course they're gaming the system, and have been since the plutocrat 'Framers' framed their deal. Plutocratic oligarchy reigns, always has.
Don't forget that one way to bribe or give campaign donations is to assign a trade after the fact. There was a strong suspicion that Hillary Clinton's cattle futures trading success was a way to funnel funds to Bill.
When they extoll the virtues of the "invisible hand of the market," I guess we now know what they're talking about.
Another evident example of double standard with regard to "privileged" and non-privileged US citizens.
♥R
Ever get the feeling that the entire system in DC is rotten, rotten, rotten?
"“We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain,” they concluded."

That's all well and good, but the burning question in every American's mind right now is "When is the next pretty-white-girl-related media circus/trial going to start?"
This isn't really news, that congress has had an inside line on how things may happen before they happen for years now. I almost wonder if the Speaker may have some short positions that will be exploited via US default. That would be pretty cold for Mr Tears to trash the world economy for a few bucks of personal gain. While I have an itchy trigger on sell orders myself around this finally of debt talks too. I keep one eye on congress for investment purposes at all times, and I'm barely in congressional league wealth.