If Martha Stewart is still looking for ways to beat the stock market, she might turn to the U.S. Senate for advice.
Members of the Senate, who belong to social and professional networks that may give them unique access to information, have managed to beat the market by nearly one percentage point per month, according to a recent study.
The study, "Abnormal Returns from the Common Stock Investments of the United States Senate," included these conclusions:
. The returns of stocks purchased by senators often rise in the year after they were bought, while high-performing stocks are likely to plateau after senators sell them.
. A small group of senators is highly active in stock market investing, while many senators don't trade at all.
. More junior senators tended to beat more senior senators in the market.
. Democratic senators performed better than Republican senators in the market, but not by much.
The study, which is being published by the Journal of Financial and Quantitative Analysis, was compiled by Alan J. Ziobrowski, a professor at the Robinson College of Business at Georgia State University, along with Ping Cheng of Florida Atlantic University, James Boyd of Kent State and Brigitte Ziobrowski of Augusta State University.
The group gleaned its data from Senate financial disclosure reports, tracking the returns of 62 senators who made stock transactions during the period of 1993-1998.
They found that a portfolio that mimics the senators' stock purchases beat the market by a total of 85 basis points per month over the six-year period, while a portfolio consisting of the stocks senators sold trailed the market by 12 points per month.
"It was very clear that there was some form of informational advantage here," Ziobrowski said in a telephone interview from Atlanta.
Ziobrowski cited another study of corporate insiders who were able to beat the market by a statistically significant amount. "It's only half as much as the senators were able to do," he said. "If you can beat the guys that manage their companies," he said, "that's pretty astute."
Ziobrowski declined to single out any one senator who beat the market. "I don't want to go there as an academic," he said, adding that there was "no way" he could tell whether a particular investor simply got lucky or had an informational advantage.
"I don't want to brand some senator with a scarlet letter that perhaps he doesn't deserve," he said.
But the study lists the four most active traders in the Senate during the period of study: the late Sen. Claiborne Pell (D-R.I.), Sen. John Warner (R-Va.), former Sen. John Danforth (R-Mo.) and Sen. Barbara Boxer (D-Calif.).
But just because a certain senator traded actively doesn't mean he or she got rich or had any informational advantage. In fact today, some senators hold their investments in blind trusts, limiting their ability to profit from their connections.
"I've done miserably," said Warner when asked about his stock performance. Warner said he refuses to buy any defense stocks, since he oversees the industry as chairman of the Armed Services Committee. That could harm his portfolio.
But Warner allowed as how he does come across the occasional tip. "Turned one down yesterday," he said, referring to a suggestion that he get in on an initial public offering. "Forget that," he said.
"I'm 77 years old. I live very modestly," said Warner, who said he had not need to try to run up big stock returns.
Boxer, a former stock broker, said, "We've done pretty well." But she indicated that she has had her investments in a blind trust for at least three years. "We've always had a power of attorney," she explained.
Sen. Jon Corzine (D-N.J.), a multimillionaire former investment banker who spent $60 million of his own money to win his Senate seat, laughed off the study. "I did pretty well before I was a senator," he said. Other senators have shunned stocks completely. "Never had one," said Sen. Chris Dodd (D-Conn.), who said his only stocks are in a 401(k) retirement fund.
Ziobrowski said he was perplexed by the finding that junior senators fared better than senior members - who are more likely to have powerful committee chairmanships. "Some might argue they are less entrenched than the older people."
And, he explained, "a junior senator is still a pretty darned powerful person."
He also defended the amount of data that the study considered, calling it "extraordinarily large." While the Senate is itself a small body - and therefore it is hard to draw statistically valid conclusions about - the professors examined nearly 6,000 stock transactions by senators. "It's not a question of how many senators," Ziobrowski said. "It's a question of how many transactions."
And those transactions tended to beat the market. Ziobrowski and his colleagues took all of the stock transactions made by the senators and plotted them on a graph. They then plotted how the stocks performed during the year prior to being bought or sold, and the year after.
After the senators bought a stock, it would "take off like a rocket," he said. When the senators bought a well-performing stock, "as soon as they sell, it flattens out," he said. "It goes back to acting normal."
Ziobrowski stopped short of saying the senators are getting inside information, and said it would be impossible to prove how they are getting an apparent advantage.
"They know when to buy," Ziobrowski said. "Conversely, they know exactly when to sell."