American Politicians: Bad For Our Investments, Great For Their Own Investments

I was struck by a dichotomy of results from two recent investment studies. They seem to indicate that when it concerns the average American's investment portfolio, political class actions are really bad news for getting good investment returns. However, when it concerns our politicians' personal investment portfolios, political class actions are really good news for getting investment returns. How could this disconnect be possible, he asked sarcastically?

Let's start with the first investment study, one we have already referenced in a previous post. An investment fund manager by the the name of Eric Singer recently completed his analysis and developed something he called the "Congressional Effect." His overall conclusion from his analysis was as follows: "Over long periods of time the stock market performs dramatically better on days when Congress is out of session as compared to days when Congress is in session."

More specially, over the January, 1965 through December, 2010 time period:

1. The stock market returned less than 1% on an average annualized basis when Congress was in session.
2. The stock market returned 16.6% on an average annualized basis when Congress was not in session, a difference in return of almost 16% annually.
3. However, results get even more dramatic over the past ten years since the annualized rate of return when Congress was in session over the past ten years was -7.6% while it was 12.7% when it was not in session.
4. The difference was 20.3% in the past ten years vs. about 16% over the entire time frame.

Thus, it would appear that listening to politicians talk, squabble, and wander aimlessly through their Congressional sessions does not instill confidence in the market, resulting in everyone's investment portfolio getting bad returns when Congress is actively doing their job.

But this is really not a true statement, not everyone suffers as a result of the politicians being in office. Paradoxically, the very politicians that cause everyone elses' investment returns to nose dive actually do extremely well with their own investments when they are in office. A recent analytical report titled, "Abnormal Returns From the Common Stock Investments of Members of The U.S. House Of Representatives," shows that between 1985 and 2001, members of the House enjoyed a considerable advantage over members of the public on their personal investment returns. These results are totally congruent with a similar, previous report the four authors of this report did with U.S. Senators.

Specifically:

1. The study measured 16,000 of House Of Representatives' common stock transactions made by 300 House members between 1985 and 2001.
2. These stock transactions returned "significant positive abnormal results" (vs. total market returns).
3. These abnormal returns  showed that a portfolio that mimicked the common stock purchases of House members would have beaten the market, on average, by about 6.6% annually.
4. This is smaller than the advantage the Senators from the previous study incurred but still significantly ahead of total market returns.
5. A $100,000 investment getting average stock market returns of 11% over a 17 year period (such as from 1985 to 2001, the period of the House study), would have grown to $589,000.
6. That same $100,000 investment invested along the lines of the House of Representatives average return, 6.6% higher than the market, would have grown to about $1.6 million, about three times as much.
7. If the House of Representatives $1.6 million got only average returns for the next twenty years, that House member would have grown the initial $100,000 to about $13 million while the average Senator would have grown their initial $100,000 to about $18 million.

Is it any wonder why politicians do anything they can to stay in office, regardless of how their behavior and Congressional votes and behavior negatively affect the average American? Most of these people are not in it for the service they can do to their country, they are in it for the service they can do to their investment portfolio. The study concluded : "We find strong evidence that members of the House have some type of nonpublic information which they use for personal gain." Well, duh, I think so.

Just consider a few of Senator Majority Leader Harry Reid's investment strategies over the past few years. According to John Ransom, writing for Townhall.com on September 30, 2011, in 2008, one month before oil prices took a historical plunge, the good Senator sold between $15,000 and $50,000 of energy stock holdings he held in the Dow Jones Energy index. Shortly thereafter, he purchased between $15,000 and $50,000 worth of health care holdings in the Dow Jones Health Care Index at a time when he was considering rewriting the nation's health care laws.

Or consider the shenanigans of Congresswoman Ginny Brown-Waite. According to an article that was written by John Frank for the June 30, 2009 St. Petersburg Times, one day before the House of Representatives approved a massive bank bailout plan in October, 2008, the Congresswoman bought stock in Citigroup, one of the major banks that received a significant portion of the bank bailout funding. About two weeks later, on the day Treasurer Henry Paulson announced he would invest $250 billion of taxpayer money in nine major banks, the Congresswoman bought stock in Bank of America, one of those nine banks.

Both cases just smell to high heaven. If ordinary Americans behaved like this, we would be going to jail for insider trading. When members of the political class do this type of thing, nothing happens except that they continue to enrich themselves rather than focusing on fixing the issues facing America today.

The appearance of conflict of interest is just as loathsome as actual conflicts of interest and these two examples are definitively in loathsome neighborhood. Maybe if they had been more focused on fixing our energy problems, our health care problems, or our dysfunctional banking system problems than trying to maximize their portfolios returns, the country would be in much better shape.

Two steps are urgently needed here. First, any Federally elected official needs to put all of their investments in a blind trust for as long as they are in office, a trust that they have no control over, both the investments within that trust and the timing of trades within that trust. There needs to be a wall of silence built between the politician and the entity managing their trust, absolutely no communication at all.

The second step is Step 39 from "Love My Country, Loathe My Government." This step would impose term limits on all Federal politicians so that they do not get into office to enrich themselves, they get into office to fix the problems of the country. By limiting their long term potential, via term limits, to use their elected position to enrich themselves and forbidding them any control over their investment portfolios while in office, we should attain two positive results. First, these people might actually do what is right for the country vs. what is right for their personal wealth. And second, by eliminating the temptation to dabble in the stock market via blind trusts, they may actually spend more time working on problem resolutions vs. working on personal enrichment.

In the face tens of millions of Americans that are unemployed, underemployed, or having given up looking for work, this type of behavior is despicable and should be criminal. It is no wonder that  members of Congress, as a whole, receive single digit approval ratings. The least they can do is not be in session since according to Mr. Singer that would at least give us a fighting chance to catch up to their out sized investment gains.

But what does that say about our politicians' abilities: we would rather have them do nothing than do what they usually do. Very scary, very scary indeed.



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