Weekend Question 1: Got a Winning Investment Strategy?
ANSWER: I know better than to guarantee investment results. But you’ll be impressed with what Andy Roth at the Club for Growth came up with when he looked at investment results when Congress was and wasn’t in session.
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Mind ….. boggling, but it makes perfect sense — so much sense that you wonder why no one else has uncovered it:
I have calculated that if you had invested $1 in the stock market at the beginning of 2006 and only invested it on those days in which Congress was in session, then your return by the end of the year would be as follows:
In Session (S&P 500): 2.25%
Conversely, if you invested that $1 on days when Congress was out of session, your return would be:Out Session (S&P 500): 11.56%
That’s quite a big spread (9.31% to be exact). Alternatively, if you invested that money in the Nasdaq Composite instead of the S&P 500, the results are even more dramatic:In Session: -5.70%
Out Session: 8.19%
Spread: 13.89%…… if you had invested $1 in the Dow Jones Industrial Average back in 1897 when the index first started and conducted the In/Out Session schemes until the year 2000, here’s how much money you would have:
In Session: $2
Out Session: $216That $2 figure is not a typo. Jaw-dropping, huh?
The logic as to why that has worked out as it has is simple:
- Regardless of whether Congress is up to something good or no good, the markets hate uncertainty. When Congress is in session, laws might get passed. When they aren’t, that “certainly” isn’t going to happen.
- The track record of Congress, certainly since the New Deal and probably during much of the time before that, has been to pass laws and regulatiions restricting economic freedom and open markets. Of course the investment markets aren’t going to like that, and will negatively react when it happens.
But Andy, the problem is — you told everyone. Some smarties out there already knew this but didn’t tell us, which might explain their mansions, cars, etc. Now we’re going to see the craziest inflows and outflows you’ve ever seen on days when Congressional sessions begin and adjourn.
Anyway, the logical answer to all of the above is this — Nancy, Harry, Mitch, John, EVERYONE — GO HOME. It looks like paying everyone congressperson and senator their full salaries to stay home would be quite a deal. 535 more people on the golf courses would be a small price to pay for the differences in investment performance Andy cited.
Color me unimpressed. If you invested your money in an S&P 500 index fund, you would have earned 13% without participating in stupid experiments.
Comment by Kevin — January 6, 2007 @ 1:04 pm
#1, I’d like to figure out a way to reverse engineer this.
Ibbotson’s data says “Large Stocks” (i.e., the S&P 500) has returned 11%-plus over 70 years. So staying put with the hassle factor has its benefits.
What he should have done is annualize his results, i.e., if congress was in session half the time, his annualized in session return in 2006 would have been 4.5% plus a little compounding, while his annualized out of session would have been over 23.12% plus compounding.
The thing that complicates it, of course, is that he’s in cash on the days Congress is in session, and ignores the fact that he has to incur the transaction costs all year long of going in and out so frequently.
Nevertheless, the contrast between in-session and out-of-session results is stunning.
If the idea holds in other countries, the really slick thing to do would to move money around internationally so that you’re always invested in countries whose legislatures are out of session. The transaction costs would be worth it if you’ve got a lot of money and you’re continually generating 20%-plus returns.
Comment by TBlumer — January 6, 2007 @ 1:30 pm