We Americans pride ourselves on building a system of government where no one is above the law – not even the lawmakers themselves. Except… well, sometimes they kind of are. As this week’s chart shows, congressmen have historically done a lot better in the stock market than the average American household has. This suspicious outperformance is made possible by the widespread and technically legal practice of congressional insider trading.
As our Income Expert Marc Lichtenfeld wrote a few years ago…
I know a nearly foolproof way of getting rich. It doesn’t involve signing up for one of The Oxford Club’s services, and it doesn’t require much risk because you already know the outcome. In fact, you’ll help decide it. One thing you can do to increase your net worth by 10-fold is get elected to Congress.
It’s easy to understand how our representatives and senators obtain valuable financial information. Congress makes decisions about economic policy, foreign relations, tax reform and other matters that directly affect the bottom lines of publicly traded companies.
But there are more interesting questions to be asked about this seedy phenomenon. How does Congress get away with insider trading? And how can you take advantage of this lucrative legal gray area?
Why Isn’t Congressional Insider Trading Illegal?
By the letter of the law, it is. In 2012, President Obama signed the Stop Trading on Congressional Knowledge (STOCK) Act.
This law sought to crack down on white-collar crime in Washington. Among other provisions, it instituted strict disclosure requirements for congressmen who were buying and selling securities.
At first, the law worked like a charm. The number of stock transactions made by congressmen plunged more than 50% from 2011 to 2012. Those who kept trading had to post their trades to a searchable online database.
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But then, just a year after the STOCK Act was passed, Congress amended it in a quick procedural vote. Surprise, surprise – it got rid of the online disclosure requirement.
Today, in order to see the inner workings of your representative’s portfolio, you have to go down to the basement of the Cannon House Office Building in Washington, D.C., and ask for a printed file.
Technically, that file in a damp D.C. basement still constitutes a public disclosure. Thus, your congressman’s market-beating transactions are technically not insider trading.
Unless you live near the Cannon House building, there’s no easy way to access congressional insider trading data. But anyone with an internet connection can find the next best thing.
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How to Trade Like a Congressman
Unlike our elected representatives, corporate insiders do have to disclose their trades online. If an executive wants to buy or sell stock in their own company, they have to file a Form 4 with the SEC. Then you can find that form in a searchable database on this website.
Washington weaseled its way out of this simple disclosure requirement. But the private sector still has to abide by it.
Good investing,
Sam
*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.