Ruled By Geniuses!

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An interesting tidbit in James Surowiecki's column in this week's New Yorker:

Last year, Alan Ziobrowski, a professor at Georgia State, headed the first-ever systematic study of politicians as investors. Ziobrowski and his colleagues looked at six thousand stock transactions made by senators between 1993 and 1998. Over that time, senators beat the market, on average, by twelve per cent annually. Since a mutual-fund manager who beats the market by two or three per cent a year is considered a genius, the politicians' ability to foresee the future seems practically divine. They did an especially good job of picking up stocks at just the right time; their buys were typically flat before they bought them, but beat the market by thirty per cent, on average, in the year after. By those standards, Frist actually looks like a bit of a piker.

The full study doesn't appear to be online, but here's the abstract. Surowiecki goes on to consider arguments against insider trading laws, but concludes that insider trading ought nevertheless to remain a crime. Brian Doherty took the opposite position back in 2002.

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  1. Stock markets work best when all the relevant information about a company is spread as widely as possible, as quickly as possible…Someone selling a stock in huge quantities because they know something will happen soon that will lower the stock?s value helps spread the knowledge that the price ought to be dropping.

    Okay, then in support of Brian’s theory, why not require people dumping their 1,250,000 shares of hypedbuzz.com or whatever to take out a full-page ad in the NY Times?? Because his theory is only plausible if the reasons behind the stock’s drop in value are known, not secret. By letting the stock’s weaknesses known, the price will plunge, which is exactly what these creeps are trying to avoid long enough to foist their garbage on to the next shmoe.

    I though the motto around here was “Free Minds and Free Markets”, not “Sneaky Minds and Rigged Markets.”

  2. The arguments against allowing most people to trade on inside information are completely separate from the arguments against allowing a senator to trade on insider information, it would seem to me…

  3. If nothing else, term limits (I’d propose two terms as Senator, six for the House, with no combination of years in the Senate and House to exceed 12) would allow the market-
    rigging ooportunities to be spread out over more people.

  4. The politicians are either market geniuses, or their political positions give them the power to manipulate the market to their advantage. Now, which one is it, I wonder?

  5. I think more studies like this need to be done. Were I a better mathematician, I would probably do like Surowiecki and put my research skills to practical use (i.e. catching sneaky pricks).

  6. Government-managed retirement accounts start to make a lot more sense. We’ll just let our Senators manage the funds and do the trades, and trust that they’ll deliver a good return for us.

  7. smacky,

    As a mathematician friend (and former roommate) from Munich told me once – “Its all about numbers.” Aside from being a rather bright fellow, he also makes kick-ass pasta.

  8. I wonder if there was much of a difference between Republicans & Democrats?

  9. Were I a better mathematician, I would probably do like Surowiecki and put my research skills to practical use (i.e. catching sneaky pricks).

    I’d probably put my skills to use being a sneaky prick.

  10. I wonder if there was much of a difference between Republicans & Democrats?

    Is there ever? Apart from arguments about how to spend tax money?

  11. It would seem to me that the best thing to do is leave well enough alone and just keep a close eye on what Senators and Representatives are buying and selling.

    Maybe some smart investment firm could start a fund based on congressional investments. That would be the first fund that can really beat the market.

  12. I’d probably put my skills to use being a sneaky prick.

    David,

    Well, maybe that too, but I think I’d get more satisfaction from exposing piece-of-shit politicians for what they are.

  13. “I wonder if there was much of a difference between Republicans & Democrats?”

    There were not. I’m sure that’s a shock to some.

  14. Or “there was not,” whichever is grammatically correct.

  15. I’m waiting for a NYT article on how a review of 3,000 stock transactions by republican senators …..bla bla bla.
    Maybe I’m a cynic.

  16. John:

    I managed to get the full text through my university, so, to answer your question, no significant difference was found by party.

    There was a difference, however, by seniority. Senators in their first term earned significantly higher returns than who had been in the Senate for more than 16 years. (Go figure.)

  17. I was watching Kramer’s Mad Money the other day, and he had an interesting bit about how to make a ‘pure play on cronyism’. His concept is that formerly well positioned administration officials that take their Rolodex into the private sector tend to do very well. I laughed my arse off (to hide the pain) and thought of all you folks.

  18. Jason,
    How would you use this strategy to pick stocks? Buy the stock of companies employing former administration officials? Or do you mean they just get good jobs?

  19. “How would you use this strategy to pick stocks? Buy the stock of companies employing former administration officials? ”

    Yes. His suggestion was an energy company whose honcho came fresh from inside the beltway. The argument was that the Rolodex is something that isn’t included on the balance sheet but which has a huge impact on regulated industries.

  20. “Buy the stock of companies employing former administration officials?”

    Hmmmmmmm. It think I need to start looking up some data. Past performance is no guarantee of future results, they say, but this one may be a little different.

  21. I wonder if there is a way to bring legal claims against Congresspeople on this basis alone. At some point, the extra market returns might be considered so great as to constitute strong evidence of improper behavior. I wonder if any of the undue influence laws track this simple, intuitive reasoning.

  22. I wonder if there is a way to bring legal claims against Congresspeople on this basis alone.

    i have to think that of even greater benefit to mr ligon’s trading plan (and of ever greater criminality) woudl be the former employers of electd civil servants in the executive branch. they’re the ones, after all, that spend the money in practice. seeing as congress doesn’t actually control how funds are allocated and spent anymore on a large scale, i think this might be a better approach.

  23. There were not. I’m sure that’s a shock to some.

    only to those who shoudl be used to being shocked by reality, messrs jdm and adam. 🙂

  24. i have to think that of even greater benefit to mr ligon’s trading plan (and of ever greater criminality) woudl be the former employers

    If we repeal the marijuana laws, then tere will be plenty of room in the jails for both public and private peddlars of undue influence. That’s my plan.

  25. Since this is pretty much proof that members of Congress are doing something inappropriate (I agree with the author–they’re probably trading on insider information, aka taking bribes), where’s the investigation? If it’s a matter of public record that they are outperforming experts in the market, year after year, where’s the outrage? This isn’t the same as plain, old insider trading because the people giving the inside tips to politicians probably expect some pittance in return.

    Of course, maybe they are brilliant, in which case I say let them privatize Social Security and manage the fund.

  26. don’t forget the cocaine laws, Dave W.
    mmmmmmmmmmmm cocaine.

  27. don’t forget the cocaine laws, Dave W.
    mmmmmmmmmmmm cocaine.

    Oh, one of you free trade wise guys.

  28. If we’re ruled by geniuses, explain how the Clintons lost money on the Whitewater deal. Was the cattle futures score a product of genius?

  29. Pro Libertate,

    The Republican and Democratic parties would oppose such investigations as it would limit the amount they can earn on insider trading.

    Libertarians on the other hand oppose such investigations because you can’t trust politicians.

    The holy trinity of letting the government walk over you. R/D/L united in letting our leaders bend us over.

  30. “Were I a better mathematician, I would probably do like Surowiecki and put my research skills to practical use (i.e. catching sneaky pricks).”

    “I’d probably put my skills to use being a sneaky prick.”

    I’d probably put my skills to use in figuring out the tip more rapidly. And no matter how drunk I get, I wouldn’t have to round everything up to the nearest $5 or $10 dollars like I do now when tipsy.

  31. If these senators are getting their information from corporate insiders, then it is certainly illegal. But if the information is a result of advance notice of some regulatory or other government action, then I’m not so sure this is insider trading. In any case, even if the SEC doesn’t undertake an investigation because of political reasons (which is slightly doubtful considering the SEC is fairly independent from politics as agencies go), private litigation is allowed for insider trading under Rule 10b-5. So if you owned stock in a company during the time those senators were trading in that company, call up your nearest class-action lawyer and get a suit going.

  32. cdunlea,

    Even better, check out this whopper:

    If you analyze historic price/earnings ratios and decide that a stock is overvalued and then sell, you took advantage of knowledge that many others don’t have.

    Doherty doesn’t seem to understand the difference between secret knowledge and knowledge that anyone can find out with a little research. Yecch, what a terrible article. I wasn’t around here in 2002; if I had seen this article I probably would have left immediately.

  33. Rhywun,
    You’re right. Pretty poor. They should take the link down for the sake of their own reputation.

  34. If you are truly a genius, you invest in cattle futures. That way you don’t need to wait a whole, long year for big profits.

  35. Rhywun — yeah, i held my tongue. That piece is pretty awful. I can’t even say “nice try” because it wasn’t.

    Antonin, exactly. That’s one they should scour from the Google cache and never speak of it again.

  36. Rhywun,

    Yeah, well you try writing an article on economics while at Burning Man!

  37. I agree with Brian Doherty that “Insider Trading” should not be a crime. But when senators do it, it raises questions of, and is indeed probably due to, selling government power for information. Of course, the effective solution here is to restrict government power.

  38. Rick, I couldn’t agree more. Let politicians be as corruptible as they want to be, but no one would bother giving them anything if their powers were, say, limited. As P.J. O’Rourke said, “Giving money and power to government is like giving whiskey and car keys to teenage boys.”

  39. If these senators are getting their information from corporate insiders, then it is certainly illegal. But if the information is a result of advance notice of some regulatory or other government action, then I’m not so sure this is insider trading.

    Some parts of insider trading are not enforced, just like antitrust law is not enforced.

    As far as unenforced insider trading, one only needs to think back to the Martha Stewart situation, where they could not convict her of insider trading, even though her insider trading was quite clear. This kind of anomaly happens when the executive and/or judicial stop paying attention to laws that rich people find inconvenient.

  40. I wonder if any analysis was done to see whether laws pending (and passed) by the specific congressmen had an impact on the companies they traded. This goes beyond insider trading – they couldeasily propose write draconian bills to smash a stock price then fail to pass it and ride the rebound. PR bills are floated all the time, that have no chance in hell of passing, for campaign fodder.

    Worse, they could pass laws because they will shift the market in a way that favors their portfolio. sigh

    It’s not the pay, it’s the fringe benefits!

  41. Dave W: They tried to charge Martha with insider trading. The judge threw it out because she clearly didn’t violate the law. As I understand it, she wasn’t technically an insider to the company, and so couldn’t be an inside trader (unlike the friend from whom she indirectly got the info). I believe that her stock broker was breaking the law by telling her, but that she broke no law in making the trade.

    As an aside, you know copyright, right? Do you know anything about the claim that “it’s legal to download the ROM of a video game you don’t own if you keep it for less than a day?” It seems unlikely to me, but that doesn’t mean it’s impossible, and if it’s false I’m curious where it came from. Thanks.

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