Thread: Who consistently beats the market? U.S. Senators do!

This article comes from Today's edition of the St. Paul Pioneer Press - there is no emoticon for what I'm feeling right now:

Senators' stock savvy suspicious

GAIL MARKSJARVIS



Savvy investors run a test on stocks before deciding to buy them: They check to see if corporate executives have recently bought or sold the stock, because these insiders observe company operations firsthand and presumably know if the investment will be a moneymaker or not.

But it would be even more valuable to watch U.S. senators.

According to an academic study that will be published in December, senators are so shrewd about buying and selling stocks that their investments perform even better than the executives who enjoy corporate catbird seats.

In fact, the senators' investments beat the stock market by almost 12 percent a year — a tremendous feat that probably can't be explained by investment prowess or blind luck, says Alan J. Ziobrowski, a Georgia State University finance professor who co-authored the study that will appear in the respected Journal of Financial and Quantitative Analysis.

"The whole thing smells bad," says Ziobrowski. He analyzed stock trading by senators along with Ping Cheng of Florida Atlantic University, James Boyd of Kent State University and Brigitte Ziobrowski of Augusta State University.

"How do you get smarter than corporate insiders trading their own stocks?" says Ziobrowski. His guess: "By having knowledge that legislation might be coming that can have a profound impact on a company's bottom line."

Picking stocks consistently is so difficult that only about 20 percent of professional money managers can beat the market. And doing even 1 percent better than the market is widely applauded by investment pros. According to Ziobrowski's study, corporate insiders outperformed the market by 6 percent.

The business professors analyzed stocks that members of the Senate bought and sold between 1993 and 1998 — not mutual funds and not stocks that had been put into blind trusts. With a blind trust or mutual fund, a senator would have had no control over which investments were bought and sold.

The researchers found that the senators' stocks climbed 25 percent within the 12 months after they had purchased them and peaked close to the time senators sold them.

Ziobrowski isn't sure why, but "senators clearly have information we don't have about an industry, and they can have some control over it.''

He is looking into whether there was a relationship between stocks that the senators purchased and their committee assignments. While it's too early to come to a conclusion, Ziobrowski says early evidence suggests there may be a connection.

He is concerned about the potential of conflicts of interest. For example, he says, a company that wanted favorable treatment could whisper a secret about the company's prospects to a senator. "This could be a very attractive vehicle for a bribe because there would be no paper trail," he says.

But the researchers emphasize they have identified no illegal activity.

Strict reporting requirements force corporate executives to report insider trades, and people such as Martha Stewart go to prison if they buy or sell a stock based on information that's not available to the public.

Yet members of the U.S. Senate (and House) are not prohibited from buying stocks based on information they derive from being public officials.

Ziobrowski thinks senators should report stock trades after one month. He has provided a copy of the study "Abnormal Returns from the Common Stock Investments of the U.S. Senate" to the Senate Ethics Committee and the Securities and Exchange Commission.

In a sign that the politicians may have received favored treatment, the study identified several instances in which senators had shares in initial public offerings. It's typically difficult for average investors — even wealthy ones — to gain access to such shares. Those who do get them can make a quick profit by selling them quickly after a company goes public.

Because of the extraordinary nature of IPOs, the researchers did not include them when computing the stock returns of senators. They also didn't include foreign stocks, preferred stock or real estate investment trusts.

Only about a third of senators had stocks during the six-year period studied.

Norm Coleman was not a senator yet. Then-Sen. Paul Wellstone had no stocks and Sen. Rod Grams had few, says Ziobrowski. Current Sen. Mark Dayton, DFL-Minn., has an extensive portfolio, but Ziobrowski says he has not analyzed the specific trades or Dayton's individual performance.