Tuesday, November 15, 2011

Volume 3 Issue 46: Intelligent Investing

Insider Trading At Its Best

This is crazy:
"In mid September 2008 with the Dow Jones Industrial average still above ten thousand, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were holding closed door briefings with congressional leaders, and privately warning them that a global financial meltdown could occur within a few days. One of those attending was Alabama Representative Spencer Bachus, then the ranking Republican member on the House Financial Services Committee and now its chairman. 
Schweizer: These meetings were so sensitive– that they would actually confiscate cell phones and Blackberries going into those meetings. What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options based on apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. I mean, talk about a stock tip. 
While Congressman Bachus was publicly trying to keep the economy from cratering, he was privately betting that it would, buying option funds that would go up in value if the market went down. He would make a variety of trades and profited at a time when most Americans were losing their shirts."
Even though the Congress is exempt from insider trading law, many of 60 Minutes’s findings are hugely damming, which you can tell just by looking at the stunned faces of John Boehner and Nancy Pelosi when Steve Croft questions them about their special dealings. The video is here.
With such insider deals going on day in and day out, it is very demoralizing as an individual investor. Is stock market investing (speculating/trading) all about insider information now? I can't help but feel disillusioned. And then here is Warren Buffett cutting a deal with the SEC:
How do you buy $10bn worth of stock in a big blue chip like IBM without alerting the market?
Check out the footnote to Buffett’s latest disclosures of his investment holdings released by the SEC:
“Confidential information has been omitted from the Form 13F and filed separately with the Commission.” 
In other words, Buffett got permission from the SEC to keep some of his stock holdings secret. This isn’t unusual for Buffett. Most big investors have to publicly reveal their stock investments every three months. 
Problem is, when other investors get wind that Buffett is buying a stock, the price tends to zoom up — meaning the price goes up for Buffett to buy more. So Buffett periodically asks the SEC to keep some of his stockholdings a secret.
Isn't this what efficient markets is all about? Warren Buffett may be every value investor's hero, but even that doesn't warrant him special treatment by the SEC.

HT: Marginal Revolution, Alphaville