Do Congressional Reps Beat the Market With Inside Info?

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House of representativesInformation is power, and members of the U.S. House of Representatives sit on a gold mine of it. Their seats on Congressional committees give them an inside view of the companies they regulate through legislation. This can be profitable information to anyone trading stocks -- and it should go without saying that our legislators should not be able to profit from that advantage.

However, statistically at least, it appears that some members of the House have used that information for their own stock market gain.

A Random Walk Down Pennsylvania Avenue

A study published this year, entitled Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives, found that stocks purchased by House members from 1985 through 2001 "earn statistically significant positive abnormal returns."

How abnormally positive are we talking? According to the study, House members outperformed the market by more than six percentage points a year.

Senators, it turns out, are even better stock pickers than both their colleagues in the House of Representatives and professional money managers. An earlier work by the authors of the House study showed that a portfolio made up of the common stocks owned by U.S. Senators between 1993 and 1998 outperformed the market by about 10 percentage points a year. According to the paper, those are "some of the highest excess returns ever recorded over a long period of time, significantly outperforming even hedge fund managers."

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The study suggests that the senators' better return comes not from a higher investing acumen than House members, but from their greater power to affect legislation.

One senator out of 100 will have more relative power than one representative out of 435. And apparently, those senators aren't shy about using their power. In years where direct comparisons could be made, 27% of the senators purchased common stocks, as opposed to 16% of representatives.

Senators also seemed to have better information on when to sell. The reps' common stock investments gained significantly in value even after being sold. But the upward momentum of senators' investments tended to peter out after they sold.

Which Party Gained More?

If you believe that the Republicans have more in common with Wall Street than the other party does, well, surprise! Democrats' investments outperformed the Republicans' in both the House and Senate study. The authors hasten to add that "party affiliation is statistically significant only in the House of Representatives."

They also say that outcome may have more to do with which party is in power during the periods of the studies than anything else. After all, the majority party does get the committee chair positions, and with them, more power.

Significantly, both studies found that seniority plays a role in trading success -- but in a way opposite of what one might assume. The most junior House members and Senators tend to do better than their more senior colleagues. Maybe the juniors are just hungrier than their elders. Or perhaps they just eventually become so powerful that they no longer wish to invite closer scrutiny of their investments. As Alan J. Ziobrowski, one of the authors of the study, told the New York Times, "At some point, it could be that the risk isn't worth the return, if you know what I mean."

Motley Fool contributor Dan Radovsky is not a member of Congress, but he hopes for the same returns.

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