Courtesy of Lee Adler of the Wall Street Examiner
Economist Brad Delong did an analysis of Mini Ron Paul Ryan’s stock trades and concluded that Mini Paul probably did nothing unethical. Delong says that the trades that Mini Paul did in the period in question appeared to be part of his normal pattern of frenetic mid month trading. Here’s a portion of what DeLong had to say about it.
The impression I get from these 27 transactions in individual bank stocks in 12 months, 17 of which involve not net injections or withdrawals but rather switches between banks, is of a guy who simply does not know what he is doing.
There are three sound reasons to trade:
rebalancing: you find that you are bearing too much of some idiosyncratic or systematic risk factors, and want to shed that risk on to the market–but that doesn’t motivate switching out of some banks into others.
liquidity: you need to either put money into or pull it out of the market–but that doesn’t motivate switching out of some banks into others.
information: you know something, either because of better analysis of public information or because of inside information, that Ms Market does not–in this case, that Ms Market has gotten her assessment of the relative strength of different money-center banks wrong, and is too bearish on either Goldman Sachs (1/22, 6/16, 9/18) or Citigroup (2/22, 7/17, 10/20).
Whenever you neither rebalance your portfolio nor move money into or out of the market but instead switch out of stock X and into stock Y, you are able to do so only because somebody else–or somebody else’s–thinks that it is a good idea to switch out of stock Y and into stock X. And if it is a good idea for them to switch out of stock Y and into stock X, it cannot be a good idea for you to switch out of stock X and into stock Y. Such trades are a bet that your counterparty is a fool–and since your counterparty in all likelihood is sitting at the corner of 57 and Park or on Canary Wharf with a staff of 5, each of whom has much better quantitative analytical skills than Paul Ryan or his broker, watching and analyzing the relative valuations of bank stocks full time, odds are that you are the fool.
via Brad DeLong: Reflections on Paul Ryan’s Transactions in Individual Bank Stocks in 2008.
Actually I don’t agree with DeLong’s 3 reasons to trade. Mini Paul could be a master stock chartist trading off overbought and oversold stochastics and relative strength, fine tuned with triangular moving averages, MACD rollovers and upturns through the zero lines on 10 minute real time stock charts, while he wasn’t too busy passing important legislation or figuring out how to cut taxes and throw senior citizens into private medical insurance until their vouchers ran out.
That would be perfectly acceptable.
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