Insider information was required but insufficient
Perfect knowledge of the future does not have infinite value.
Suppose you knew to-the-penny how much three different stocks would be one month from now. The "value" of that information has value only if the performance of "best" of the three stocks is better than the market average. If all three stocks were "dogs", then the information has zero or negative value.
In that sense, insider-information is limited. To get really eye-popping results there needs to be more than just insider-information.
High-cost producers can produce the highest returns
That is counter-intuitive, isn't it. So it requires a bit of explanation.
Suppose you want to invest in gold and have three choices. You can purchase 10 ounces of gold for roughly $27,000 or you can buy $27k of mining stock in a company that is very efficient and can produce gold for $1000 an ounce or you can buy stock in a company that is a high-cost producer and it costs them $2600 to produce an ounce of gold.
Now, let's say the price of gold goes up by 33% ($900 an ounce). Your return on the physical gold (not including brokerage fees and spreads) is $9000.
The profits of the mining company that was efficient went from $1700 per ounce of gold produced to $2600 per ounce and the company stock likely increased by a similar percentage...so your $27k investment returned about $14k.
The profits at the high-cost producer went from $100 an ounce to $1000 per ounce and since (in our simplified model) the price of the stock also increased by a factor of ten. Your $27k turned into $270k.
So how does Nancy Pelosi come into the discussion?
One year, Nancy Pelosi's stock portfolio returned about 150% which was the average + 12 standard deviations. The odds of that randomly happening is somewhere along the lines of the heat-death of our sun happening next week.
One plausible explanation for how that could happen would be if she not only happened to have "insider" or prior knowledge but she (or her minions) purposely directed Federal contracts (perhaps through narrow language that forced a single bidder) to high-cost producers.
Frequently, the high-cost producer is hobbled by excessive fixed-costs due to obsolete legacy facilities, bloated management and antiquated labor agreements. As their market-share and volume decreases, the fixed costs do not. Producers who have excessive amounts of fixed costs (sometimes called "overhead") are exquisitely sensitive to changes in volume. Decreases in volume are very painful. Increases in volume...like a large Federal contract...cause an explosive growth in profits and stock prices.
So...legislators are doubly motivated to pump business to dying-dinosaur companies: Both to secure the votes of legacy employees with comfortable contracts and paychecks, but also to lard their own personal wealth.
Let me repeat: Legislators are not bound by the Sarbanes-Oxley Act so they free to avoid insider-trading laws that us peons are bound to obey. That means that they can generate astronomical returns and personally profit when they funnel Federal business to the LEAST efficient supplier.
There are a lot of reason the fed.gov should be dissolved... this is one of many. People will argue it can be reformed. It cannot.
ReplyDeleteWell, we know her hubby got more than a few 'sole source' contracts... Why should we be surprised about anything else?
ReplyDeleteOddly enough, the "usual suspects" decrying the wealthy and producers remain strangely silent...
ReplyDeletePeople like PeeLousy don't just KNOW what's going to happen in the near future. They have a SAY in what's going to happen. And she's not the only one. Virtually ALL congresscritters leave office VASTLY more wealthy than they were when they entered office. The whole system is corrupt to the core.
ReplyDeleteAnd it corrupts all who enter its halls. A certain bartender with a mouth that wouldn't stop entered broke and was worth $29M in two years...oh, and she stopped bucking Pelosi & Company.
DeleteSue-prize, sue-prize, sue-prize!
They go to DC to do good and do well.
DeleteIt’s easy to get steamed.
ReplyDelete150% ROI? Joe… you probably pooped the bed on that! It’s 150% that you know about. The real figure is probably much higher, and Stretch Pelosi probably has eye popping assets the public will never know about. There are literally teams of public servants dedicated to seeing that it remains that way. They know the ins and outs of ‘aggressive accounting’ and will never pay a cent in admin fees or bank fees or taxes.
But any one of us would almost certainly do the same. We are seeing the carrot here; there is also the stick. You do what the donors want… or the line crazy nut job will be sent to get you. It could be a retarded gay prostitute with a hammer… it might be a kook shooting you from a gently sloped building right under the nose of the authorities. Gawd only knows what other ways there are to make those people play ball.
The best way to drain the swamp isn’t to voat them out… the best way is to get the money out and get the donors under control.
Fred, Make lobbying (both sides of the transaction) a 'treason' level crime. Hang the first few you catch and a lot of it will cease. While you're at it, end qualified immunity and civil asset forfeiture.
ReplyDeleteUnusual Whales has been covering this story, and providing the receipts, for some time now - if you're interested.
ReplyDeletehttps://unusualwhales.com/politics
While I wouldn't be surprised at something like that, returns of 150% a year in rising tech stocks or small pharmaceutical stocks aren't that uncommon.
ReplyDeleteFor example, a couple years ago a small pharmaceutical stock went from $0.60 a share to $260 a share because their long shot drug worked out. If you knew enough to buy in at under $50 when the news was starting to come out, you'd make over 300% when you sold. A stock like this would balance out "standard" performers.
Similar things have happened when small tech companies had their ideas work and were bought out or had IPOs.
Being connected to Silicon Valley, I assume she was in with that crowd.
Jonathan
P.S. I'm not saying she isn't corrupt, but Occam's Razor usually applies.
ERJ, your essay makes no mention of the 'Pelosi stock watchers' who simply do what she does. Presumably, all the have is their observations of her buys and sells. Yet they have realized above market returns. Indeed, returns on par with Pelosi's.
ReplyDeleteOf course, the aforementioned assumes that those stock watchers haven't lied or provided the dreaded disinformation with respect to their stock investments.
The strongest form of the Random Walk or Efficient Market holds that even insider information is very perishable and the me-too crowd quickly incorporates that information into the price of the stock.
DeleteI think you would have to be very quick on the trigger to come close to matching her performance.
It's more than insider trading, because the legislators know things even before the corporate insiders do, let alone markets or shareholders.
ReplyDelete