Congress and Insider Trading
The Richest Members of Congress
The Six Most Popular Stocks Owned by Congress
Editor's Note: In today's Cabot Wealth Advisory, you'll hear from Paul Tracy, a co-founder of StreetAuthority and chief investment strategist of StreetAuthority's Top 10 Stocks. Paul discusses the six most popular stocks owned by Congress and his theory on why our representatives are bringing in such high returns. I hope you enjoy his issue!
The truth will make you sick. Technically it's public knowledge, but I can tell you--it's Congress' dirty little secret.
Insider trading laws don't apply to Congress.
I wish I were kidding.
If this makes you mad, then you don't want to read the October 11, 2010, edition of the Wall Street Journal.
I'll let it speak for itself ...
"Chris Miller nearly doubled his $3,500 stock investment in a renewable-energy firm in 2008. It was a perfectly legal bet, but he's no ordinary investor.
Mr. Miller is the top energy-policy adviser to Nevada Democrat and Senate Majority Leader Harry Reid, who helped pass legislation that wound up benefiting the firm."
And this isn't some rogue staff member who was fired the next day. As I said, insider trading is perfectly legal ... if you're a member of Congress or a Congressional aide.
"The Journal analysis showed that an aide to a Republican member of the Senate Banking Committee bought Bank of America Corp. stock before results of last year's government stress tests eased investor concerns about the health of the banking industry.
"A top aide to the House Speaker profited by trading shares of Freddie Mac and Fannie Mae in a brokerage account with her husband two days before the government authorized emergency funding for the companies.
"Another aide to Republican lawmakers interested in energy issues, among other things, profited by trading in several renewable-energy firms."
I don't know which is worse: The fact that insider trading is legal for some of our nation's wealthiest politicians ... or that Congress refuses to do anything about it.
"A few lawmakers proposed a bill that would prevent members and employees of Congress from trading securities based on nonpublic information they obtain. The legislation has languished since 2006," according to the Wall Street Journal.
Why has it languished?
Apparently Congress is making too much money off the lax rules to do anything about it.
According to data from the Center for Responsive Politics, 319 of the 535 members of Congress are millionaires. That's 60%.
So much for representation "by the people." And why on earth would Congress change rules that have obviously helped them for decades?
But back in the 1960s there was at least a sliver of hope. Think of it as a "Milk-Bone" Congress threw out to keep the dogs off their scent.
You see, back then, Robert Baker, a senior Senate aide was roiled in a scandal involving financial gain from a network of vending machines.
He ended up spending 16 months in prison, convicted of income tax evasion.
This led to a series of rules in 1968 that required lawmakers and aides to disclose information about their finances.
The rules require all members of Congress (along with some of their higher-paid aides) to publicly disclose information on their finances every year--including stock holdings.
This means we have an opportunity to see exactly what our "representatives" are buying. And we need to know ...
Because according to Barron's, the "Holy Grail of investing has been found: get elected to U.S. Congress."
In a study cited by Barron's, members of the House of Representatives beat investors like you and me by 55 basis points a month. That comes out to an extra 6.8% per year. I think Barron's said it best ...
"To give an indication of what House members' outperformance is worth, investing at the stock market's long-term total return of 10% would mean $10,000 would grow to $25,937 in 10 years. But with their special investment acumen, their 16.8% annual returns would leave them with $47,253 in 10 years."
With this in mind, I decided to dive in and see just exactly what the most popular investments are with Congress ...
I'll be honest, the most popular stocks held by Congress aren't some "super secret" investments. They aren't exclusive investments only owned by those in Congress with some inside knowledge of a future breakthrough.
Instead, they're large multinational corporations that make up the bulk of many average investors' portfolios.
I won't keep you in suspense ...
But as I said above, Barron's cited a study that suggests members of Congress post returns much better than average investors.
Insider trading may be legal, but if their most popular holdings are similar to what many investors own, how is it that Congress can earn such higher returns?
No one can say for sure, but my research is turning up a few clues. For one, the average holding period for an investment was seven years in 1940, according to William Hutchings of the Financial News. By 2007, the period had shrunk to just seven months.
OK, investors are trading more ... so what?
Well, it seems that this higher trading frequency may actually hurt returns. In fact, by trading less and holding longer you can actually increase your chances of success.
A recent study by mega-investment firm Oppenheimer showed that the S&P 500 has NEVER suffered a loss in a 20-year period (measured in rolling monthly periods). Their study went all the way back to 1950.
Of course, we all know you can't say the same for holding stocks for a year or two. When you hold stocks for a short period of time, your odds of losing money are much, much higher.
And you can lose a boatload of money in a hurry ... as if we needed a reminder in this market.
In fact, in its worst one-year period, the S&P 500 dropped 44.8%.
So then is that their secret? Are our representatives buying well-known stocks and holding them "forever"? It's impossible to know--representatives only have to disclose holdings while they are in Congress. What they own before or after their terms is still secret.
But it could have something to do with it. After all, every one of the six stocks above has a positive 20-year return. Cisco returned more than 5,800% over this time. And Bank of America--despite its recent problems--has still delivered a 121% gain during the past two decades.
Of course, to actually see those returns you would have stomach the hard times and avoid selling during rough patches. This may be easier said than done--but numbers don't lie.
Congress may have access to information average investors don't, but there's nothing "secret" about their investments.
Action to Take--> All the clues point to holding "forever" as the most surefire way (though not guaranteed) to make money.
[Note: If you want some more evidence for why I think buying "forever" stocks is one of the best moves you can make--in any market--learn more about my "10 Best Stocks to Hold Forever," by visiting this link.]
All the best,
StreetAuthority Co-founder and Chief Investment Strategist, Top 10 Stocks