Stocks
It is hard to see much democracy in the distribution of stock ownership. THe bottom half of the population held 1.4% of total stock in 2001, with an average portfolio of just over $3,000. And since only a minority of bottom-half households own any stock, that average is deceptively high. … If you sort households by their stockholdings (excluding pension), you find that the richest 1% of stockholders own over half the stock held by individuals; the bottom 80%, under 2%. Adding pension accounts makes these figures only slightly less lopsided…[47.7% with pensions figured in, 53.2% without].
- Doug Henwood in After the New Economy (pp. 122-124)
In the 90s quitting your job and becoming a day trader seemed like a reasonable career path to many people. I’m not sure why. While long term investment in the stock market, say via a mutual fund, might be a reasonable investment choice for some people, almost nobody is able to “beat the market.” Not without insider information that is. While some people might be able to make money day trading in a bubble economy, over the long run they are as bound to loose as a gambler in Atlantic City. At best, they might do as well as the market - which is about how well most mutual funds do. So why bother?
Here are the numbers from two recent studies:
- One study, conducted in “2000, covering 66,465 US households from 1991 to 1996 showed that the average household’s portfolio underperformed the market by 1.44 per cent a year, on average.”
- “Corporate insiders (defined as senior executives) usually outperform by about 5 per cent”
- According to another study, “US senators’ personal stock portfolios outperformed the market by an average of 12 per cent a year in the five years to 1998.”
- And even more amazingly: “Most stocks bought by senators had shown little movement before the purchase. But after the stock was bought, it outperformed the market by 28.6 per cent on average in the following calender year.”
How’s that for American style democracy?
Note: The benefits of being a senator for investing in the stock market showed no party preference - both Democrats and Republicans did just as well.
(via Calpundit.)
UPDATE: Read this important critique of the study on senators’ personal stock portfolios.
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Comments
Interestingly, this study didn’t look at IPOs, which is where a lot of the real money making is. Most ordinary investors are not able to purchase stocks in an IPO - which is already arranged by the bank before the stock goes public. The justification for this legalized insider trading is that it preserves the stability of the market! The study also shows that most of the stocks owned by senators are owned by only a handful of senators. This goes with the national trend, by which only a small portion of the population owns most of the publically available stocks (as shown by the Henwood quote). But, yes, sure - if you have the money to invest, then looking at the stock holdings of wealthy Senators is probably as good a strategy as any.
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An anthropologist and documentary filmmaker, 
Hello,
Thank you for the disclosure on Senators and the stock market. I think the most obvious questions now are, “how do I find out what they are buying and selling?” “If it’s public domain what’s to prevent anyone from simply doing as the Senators do?” (Please pardon the grammatical instability). Looking forward to your reply.
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