A bill to restrict stock trading by members of Congress was introduced in the Senate in January. Unlike previous attempts, this one actually appears to have a good chance of becoming law.
The bill wasn’t introduced in a vacuum. It comes after transactions by numerous members and their spouses have been called into question (sometimes humorously, as in the case of Nancy Pelosi’s husband and his emerging reputation as one of the better investors of all time). It does seem right to restrict congressional trading, but how much of a burden is this restriction to an average member of Congress?
The answer, in our opinion, is “not much burden at all.” There are four things necessary for an individual to successfully invest in individual stocks for the long run, which members probably don’t have. Our definition of success is beating the long-term returns of a well-constructed, diversified portfolio of equity funds for years into decades — no fair claiming you’re a stock market wizard for doubling up $500 in GameStop last year. You have to consider long-term returns of your portfolio as a whole, including any cash on the sidelines, and compare that to a reasonable benchmark across time.
To really be successful buying individual stocks, you need these four elements:
A good plan. What kind of investor are you? Do you buy undervalued companies unrecognized by the market? Do you use momentum? Do you look for fast earnings growth? Picking companies that have products you like is not enough. Even picking successful companies is not enough. Price matters, so even the greatest company in the world with the best prospects might be a poor investment (cough cough, Tesla at current valuations!).
Plenty of time. Researching individual stocks thoroughly takes a lot of time. Well-regarded funds have large teams of analysts to put together a portfolio of sometimes just a handful of stocks. You can’t glance over a Reddit post and call it due diligence. To confidently put your money to work for the long run, you need to know what’s happening under the hood. Let’s hope most members of Congress are busy solving our problems rather than thoroughly researching investment opportunities.
Good timing. Even if you correctly select companies that will outperform in the long run, there can be agonizing periods of underperformance that can take away from your ability to compound your investments over time. The fewer stocks you own, the more impact a long-term laggard will have.
Good luck. Even if you’ve done everything right, you still need a little luck in avoiding big negative surprises. An unexpected event like an accounting scandal can hurt a lot, especially if you only hold a few different positions. By definition the worst kinds of surprises are, well, very surprising.
It’s hard to imagine any member of Congress — or any average person with a day job, family obligations, and a life — to really excel at being a stock picker in the long term. In fact, we suspect the average return of an average ethical member will improve if their portfolios move into blind trusts managed by competent professionals.
We acknowledge it can be fun (or even necessary, as an insider) to take positions in individual stocks, but we always suggest that it should be as small a portion of the portfolio as possible, with the rest invested in well-constructed, well-diversified mutual funds and exchange traded funds (ETFs). Unless you have some (wink, wink) “special” knowledge gleaned from your job as a senator or representative, true long-term success in individual stocks will likely remain elusive.
Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.
