Invest Like a Senator

In the 10/31/05 issue of the New Yorker, author James Surowiecki discusses the investment habits of U.S. Senators. After discussing the current travails of Senate Majority Leader Bill Frist, who is now under probe by the SEC, Surowiecki refers to an interesting study published last year, that investigates the investment results of U.S. Senators. "see article"

The study was undertaken by Alan Ziobrowski, a professor at Georgia State University. He found that during the boom years of 1993-1998, a majority of the U.S. Senators were trading stocks, and beating the S&P 500 by 1200 basis points.

Since this was the first-ever systematic study of politicians as investors, it begs the question..."Are politicians really that smart?" Or are some of the Senators trading on "non-public material information?"

However, before drawing too many conclusions from the study, one should look closer at the particulars of the study itself. During the years in question, 62 Senators disclosed some 6,000 stock trades. Nearly 50% of the trades were reported by just four lawmakers: Claiborne Pell of Rhode Island, John Warner of Virginia, John Danforth of Missouri, and Barbara Boxer of California. Said another way, these four Senators accounted for 3000 of the trades in the study...which would mean that they made, on average, 150 trades per year in the five years in question. John Warner and Barbara Boxer are still in the Senate. John Danforth and Claiborne Pell have since left.

I wonder if these Senators were trading stocks with a "substantial informational advantage?"  I also wonder if their trading patterns have slowed down somewhat...given the realities of the markets today?

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