Why Your Congressman May Be Doing Better Than You
August 23 2012 by ChiefExecutive.net
Paul Tracy, co-founder and chief strategist of Street Authority, a financial research and publishing company with offices in Austin, Texas and Gaithersburg, Maryland, cites a study published by Barron’s where members of the U.S. House of representatives beat ordinary investors by 55 basis points a month, which translates to 6.8 percent a year. Until recently Congress was exempt from insider trading laws. They could buy and sell investments based on information to which they were privileged, but was not known to the general public.
This all changed in 2011 when the CBS news investigation program 60 Minutes uncovered a story where in September 2008 Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke privately briefed members of Congress warning them that a financial meltdown was coming. In attendance at the time was Alabama Rep. Spencer Bachus, then ranking Republican member on the House Financial Services Committee. The 60 Minutes report said, “While Congressman Bachus was publicly trying to keep the economy from cratering, he was privately betting that it would, buying option funds that would go up in value if the market went down. He would make a variety of trades and profited at a time when most Americans were losing their shirts”
This was said to be typical of what was happening by congressmen from both parties:
· Nancy Pelosi prevented a vote for two years on legislation that affected a company in which she had received lucrative IPO shares and held millions in stock
· Rahm Emanuel, when he was a congressman, showed nearly perfect timing by selling his stock in a company that his committee had oversight of and avoiding huge losses
· John Boehner bought shares in five health insurance companies just as he killed the “public option” on health care
As a result of the outrage the story engendered Congress was forced to curb such activities when the Stop Trading On Congressional Knowledge (STOCK) Act, was signed into law. The law forced all members of Congress (along with some of their higher-paid aides) to publicly disclose information on their finances each year — including stock holdings. Not only did it eliminate insider trading, but Congress must now disclose their trades within 45 days after they happen.
Peter Scweizer, a Hoover fellow at Stanford University and author of “Throw Them All Out” upon which the 60 Minutes report was based thinks, “the big problem is going to be enforcing the law. The bottom line however is that the STOCK Act in my opinion does not go nearly far enough. It will not stop lucrative IPOs which are simply a form of legal bribery, and the act will do nothing about land deals. And do we honestly think that the Securities and Exchange Committee (SEC) or any agency is going to take on a powerful member of congress?”
Street Authority’s Paul Tracy looked into what our “representatives” were buying. What he found was that many investments were popular stocks not restricted to the elite.
The table above shows the most widely held stocks owned by Congress in 2010 (2011 data hasn’t been published yet). Note that this was before Congress passed the STOCK Act.
There’s nothing magical about the picks in themselves. Owning some of the better known listed shares is hardly new. Tracy maintains that there is, apart from trading on inside information, another reason why members of Congress might outperform ordinary investors: They bought and held profitable businesses for the long haul. He was unable to find out how long the average Congressman held a given stock, but he learned that holding for the long-term was a rule most observed.
“Take Representative Lloyd Doggett (D-TX), for example,” Tracy observed.” According to financial disclosure statements, he’s owned a stake in Procter & Gamble (NYSE: PG) since May 2000. And he still owned a stake as of his most recent disclosure filed in 2011. In that time, the United States experienced two recessions, two wars, and high unemployment. Yet, Procter & Gamble’s total return during that period was over 140 percent. For comparison, the S&P 500 gained less than 10 percent during that time.
And it’s a similar story for Representative Jon Kyl (R-AZ), who bought shares of Wells Fargo (NYSE:WFC) in May 2001. He still holds a stake in the company today. Over that span, Wells Fargo has returned about 75 percent — despite the problems in the banking sector. That’s more than triple the S&P’s return of roughly 20 percent.And the simple fact is, the longer you hold an investment, the more likely you are to make money.”
Tracy further points to a study by Oppenheimer that went back as far as 1950, that shows that the S&P 500 has never suffered a loss in a 20 year period. Each of the six stocks listed above had a positive 20 year return, GE, for example, despite being more than 100 years old, managed to deliver a 480 percent return during the last two decades. This is no guarantee, but there is something to be said for owning great businesses and letting their returns grow year after year. To be sure elite investors are doing better as they are buying into an entirely separate “underground” stock market that is not open to retail investors.