It Pays To Be Elected to Office

Posted by Jeff Carter
on May 26th, 2011

Today, I announce my campaign for Congress-but I promise only to serve three terms if I am in the House, or two terms if in the Senate(you’ll see why later in the post). I have traded my own money for 22 years. I have had decent returns on equity, but recently I came across this study.

Here is the abstract:

A previous study suggests that U.S. Senators trade common stock with a substantial informational advantage compared to ordinary investors and even corporate insiders. We apply precisely the same methods to test for abnormal returns from the common stock investments of Members of the U.S. House of Representatives. We measure abnormal returns for more than 16,000 common stock transactions made by approximately 300 House delegates from 1985 to 2001. Consistent with the study of Senatorial trading activity, we find stocks purchased by Representatives also earn significant positive abnormal returns (albeit considerably smaller returns). A portfolio that mimics the purchases of House Members beats the market by 55 basis points per month (approximately 6% annually).

I now understand why campaigns have become so expensive. The net present value of beating the market by 6% annually, along with the net present value of a guaranteed government pension, cushy health benefits, and the opportunity to leverage your elected position into a lucrative full time lobbying job after “serving” your country makes the spending seem minimal.

Not only that, the speaking fees earned by Senators, Representatives and Presidents when they leave office are quite nice. Just by talking, which is something they do a lot of anyway, they are able to afford a pretty decent lifestyle. One might say that they are rich.

The study built a sample of stocks purchased by House members from 1985-2001. They tested for abnormal returns using a couple of different analysis.
Using CAPM and the Fama-French three factor model, they found that returns were positive, economically large and statistically significant.

Over the years, House members in aggregate became more active traders. In 1985, there were 350 transactions. In 2001, 1901 transactions. When looked at by political party, Democrats fared better than Republicans.

” The Democratic sample beat the market by 73
basis points per month (nearly 9% annually) versus only 18 basis points per month (approximately 2% annually) for the Republican sample.”

However, Democrats controlled the House for 10 of the 17 years studied, so there may be some bias because of that.

Wait, there is more. “To examine the issue of seniority, we divide the House of Representatives into three approximately equal groups: those Members who have served three terms or less (up to six years service), those who have served four to eight terms (seven to 16 years) and those who have served more than eight terms (over 16 years). The results suggest that seniority has a substantial impact on portfolio returns.”

But, it’s the junior members that do better than the senior members! Must be all the Washington insider stuff clogs the investment arteries. Hey, you’d think after reading this all Congressman would be in favor of term limits!

Going forward, I don’t want to hear anything about policy. What I really want to hear about is what stocks the shortest serving Representatives are buying, especially the Democrats.

Thanks very much to Instapundit for the Instalanche. Welcome to his readers.

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