Taken together, the semi-strong and strong forms of the Efficient Capital Markets Hypothesis teach that no class of investors can beat the market over time without routine access to material nonpublic information. Many studies have shown that the only investors who, as a class, routinely produce postive abnormal returns are corporate insiders. It turns out, however, that there is a second such group. As reported in today's WSJ($):
A study suggests that U.S. senators possess stock-picking skills that even the most seasoned money manager would envy. During the boom years of the 1990s, senators' stock picks beat the market by 12 percentage points a year on average, according to the study. Corporate insiders, meanwhile, beat the market by about six percentage points a year, while U.S. households underperformed the market by 1.4 percentage points a year on average, according to separate studies. The final details of the study will be published in the December issue of the Journal of Financial and Quantitative Analysis. ...
Looking at the timing of cumulative returns, the senators also appeared to know exactly when to buy or sell their holdings. Senators would buy stocks just before the shares suddenly would outperform the market by more than 25%. Conversely, senators would sell stocks that had been beating the market by about 25% for the past year just when the shares would fall back in line with the market's performance.
What explains this miraculous performance? Given that the senators are producing returns that best even such stars as Peter Lynch and Warren Buffet, shouldn't they go manage mutual funds instead of running the country? Or are senators trading on the basis of inside information? It looks like the latter:
The researchers say senators' uncanny ability to know when to buy or sell their shares seems to stem from having access to information that other investors wouldn't have. "I don't think you need much of an imagination to realize that they're in the know," says Alan Ziobrowski, a business professor at Georgia State University in Atlanta and one of the four authors of the study.
Senators, for example, are likely to know which tax legislation is apt to pass and which companies might benefit. Or a senator who sits on a certain committee might find out that a particular company soon will be awarded a government contract or that a certain drug might get regulatory approval, says Prof. Ziobrowski.
So it seems that we are ruled by crooks and cheats. The sad part, of course, is that I'm not all surprised.
