Your elected representatives beat the market!

As the United States breaks for a long weekend to commemorate our fallen soldiers in the variety of wars that we have engaged in over time, I thought it would be interesting to understand the investment philosophy of our elected leaders.

It didn’t take too long to be a little amazed. It seems that many of them do quite better than the average investor or the market at large.  There have been a couple of studies on this. While there is always the fear that this is due to insider knowledge or voting in ways to influence their portfolio, I am not sure those conclusions are valid.

In general, our elected officials tend to be a bit more educated than the average investor. Also, since they deal with corporations and massive budget items on a regular basis, they are more attuned to the market and the economy in general. Therefore, as an above average educated investor, it is not surprising that they beat the market.

Now I just wish that the elected officials performed as well at managing the public coffers that we elect them to manage!  Maybe we should give them a bonus if they do a good job. How about they get to split 1% of any budget surplus – how fast do you think they would balance the budget then?

Check out this Huffington Post article on this subject:

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.

What's their secret? The report speculates, but does not conclude, it could have something to do with the ability members of Congress have to trade on non-public information or to vote their own pocketbooks -- or both.

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."

"Being one of 435, as opposed to one of 100, is likely to result in a significant dilution of power relative to members of the Senate," the researchers wrote.

The researchers, Alan J. Ziobrowski of Georgia State University, James W. Boyd of Lindenwood University, Ping Cheng of Florida Atlantic University and Brigitte J. Ziobrowski of Augusta State University, noted that the circumstances are ripe for abuse.

"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.

At the same time, House rules don't require them to divest themselves of common stocks when they assume office, don't prevent them from trading freely while in office -- and don't require them to recuse themselves from votes that could affect their own interests.

The House ethics manual clearly states that "all Members, officers, and employees are prohibited from improperly using their official positions for personal gain" and members must disclose their holdings annually.

But the House's official position is that demanding that members either divest themselves of potential conflicts or recuse themselves when there is a conflict is "impractical or unreasonable" because it "could result in the disenfranchisement of a Member's entire constituency on particular issues."

Ever since 2006, a small coterie of Democrats has been trying to officially prohibit members of Congress and their staffs from using non-public information to enrich their personal portfolios.

The Stop Trading on Congressional Knowledge (STOCK) Act was most recently re-introduced in March by Reps. Louise Slaughter (N.Y.) and Tim Walz (Minn.). It has not been heard from since.

The study found some significant difference based on party membership and seniority, with the Democratic sample beating the market by nearly 9% annually, versus only about 2% annually for the Republican sample.

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."

The report does not make any firm conclusions on causality, although the researchers explain that their kind of "event analysis" has become a common "method for analyzing whether actors have profited from confidential information in their possession."

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Dan Froomkin is senior Washington correspondent for The Huffington Post. You can send him an email, bookmark his page; subscribe to his RSS feed, follow him on Twitter, friend him on Facebook, and/or become a fan and get email alerts when he writes.

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