Trade the Congressional Effect: How To Profit from Congress's Impact on the Stock Market

Congress and the Tragedy of the Commons

“No man's life, liberty, or property is safe while the legislature is in session.” This quote, usually attributed to Mark Twain, apparently first appeared in print in a case decided by Judge Gideon Tucker. When you think of Congress and realize that there are 535 issues entrepreneurs, it is easy to imagine that almost every day the legislature is in session is a day where there may well be legislative risk. For example, in the 109th Congress (2005–2006), there were 9,141 laws introduced with no major action, 930 with some major action, 22 that failed, and 465 that were passed.⁵ While “only” 465 became law, each one required investors to notice it, understand it, and, if necessary, change their investment strategy. If you were short Archer-Daniels Midlands (ADM) in 2004, you should have been doing your best to see if Congress was going to tilt the playing field. From January 2004 through the passage of the ethanol law, and into the summer of 2006, ADM stock roughly tripled.

One way to systematically reduce legislative risk is to have little or no equity exposure just on the days Congress is in session. With 535 issues entrepreneurs introducing literally thousands of bills, of which several hundred will routinely be passed, you can think of each day as a relentless fight for who gets to be on camera with yet another new idea. But for congressmen, the fact that that visit in front of the camera is something that may depress the stock market ...