Even as members of Congress fail to beat the stock market overall, they excel when buying and selling stocks of local companies, a new study shows.
“They seem to know something that other people don’t know,” said Jens Hainmueller, an assistant professor of political science at the Massachusetts Institute of Technology.
Hainmueller and Yale University post-doctoral fellow Andrew Eggers discovered that when members of Congress bought the stocks of public companies with headquarters in their districts, they exceeded the market by more than 4 percent per year.
Overall, though, their record was poor, as bloombergbusinessweek.com reports. A group of all their stocks trailed the market by 2 percent to 3 percent per year. Compounded over the five years of the study, that small difference was statistically significant, the authors say.
The study reconstructed the portfolios of the 422 members of Congress who held individual stocks from 2004 through 2008. In all, it analyzed 48,309 transactions in 2,581 different stocks listed on the New York Stock Exchange, NASDAQ or the American Stock Exchange.
Financial disclosure forms, which include stock purchases and other investments by members of Congress, are filed on an annual basis, and many of the forms are hand-written. For this study, the Center for Responsive Politics, a nonprofit organization that studies money and politics, transcribed the reports to convert them into digital form. Eggers and Hainmueller got their data from the center and conducted their own analysis.
Legal Stock Purchases
It is legal for members to buy stock in a company that lobbies them, or invest based on information learned in the halls of the Capitol. A bill to restrict such practices -- the Stop Trading on Congressional Knowledge Act, or STOCK Act -- was introduced in the House in January 2009 by Representative Brian Baird, a Democrat from Washington state. His bill attracted only 10 co-sponsors and failed to advance out of committee, and he is retiring this year.
The study raises questions about congressional investing, said Bill Allison, editorial director at the Washington-based Sunlight Foundation, which advocates for greater government transparency. He noted that legislators can help out local companies by influencing tax provisions, government contracts, appropriation earmarks and other policies. “When you think about what members of Congress have the most power to influence, it is companies in their district,” he said.
Timing of Investments
The study’s authors found evidence that might lessen worries about investing by lawmakers.
For example, “they don’t seem to have great timing with these local investments,” said Eggers. In other words, the politicians aren’t buying local stocks just before they jump or selling right before they fall. Rather, perhaps because they know first-hand the most capable management teams, they are picking the local stocks that do well over the long-term.
“They seem to be able to pick winners,” Eggers said.
The study, which is being prepared for publication, calculated not just the performance of members’ local stocks but also the performance of those public companies that lobbied members’ committees and of those that indirectly contributed to their campaigns. In both of those cases, the study found that those holdings performed about as well as the rest of the market.
Members of Congress don’t seem to be profiting overall from their power and connections, at least in the stock market. From the beginning of 2004 to the end of 2008, a portfolio of stocks picked by senators and representatives would have lost 30 percent of its value. By contrast, an inexpensive index fund -- an investment that’s often recommended by experts -- would have lost 20 percent in the period, which was marked by the onset of the recession and financial crisis.
No Better Than Average
“They do no better than the average individual investor,” Eggers says.
Various groups within Congress all chose stocks poorly: Democrats and Republicans, senators and representatives, the very wealthy and relatively poorer members, and members of powerful committees. The study found little evidence that in late 2008, as Wall Street was seized by financial crisis and Congress debated a rescue package, members of Congress took advantage of the situation. In fact, the authors write, “Performance relative to the market was if anything slightly better in 2004-2006 than in 2007-2008, suggesting that on average members of Congress did not capitalize on the unusually active role of the government in the economy during the latter period.”
The 2010 election is bringing to Washington more than a hundred new senators and representatives. As these freshmen members of Congress hire staff and compete for committee assignments, they might want to follow the same investing tips often aimed at their constituents: Don’t try to outsmart the market, and keep your fees low.
“If anything, this suggests they should take ‘Investing 101,’” Eggers says. “They would have done better if they’d taken widely available advice and bought a stock index fund.”