60 Minutes just released a segment that is getting a lot of heat, no doubt due to the fact that it targets high-ranking members of Congress.
In short, the report says Congress members have the ability to trade off insider information and that this insider trading is not illegal (Click here to see the full video).
In fact, the report implies that this information is one of the many ways Congress members are able to leave Congress multimillionaires.
For anyone else, insider trading is highly illegal. The Martha Stewart insider trading case is one of the better known examples. In the early 2000s, Martha Stewart received information not yet made public (i.e. insider information) from her stockbroker about a drug company—information that would drastically and negatively affect the stock price. Based on her broker’s tip, Martha sold her stock before the information became public, committing insider trading. On March 5, 2004, she was found guilty; she spent roughly five months in federal prison and another five months under house arrest.
Certainly, political graft, insider trading, or just plain corruption is not new. Obviously, individuals will use their power and access to their own advantage. We know that. That is why the U.S. Constitution was set up the way it was—to prevent officials from becoming hopelessly corrupt. The oft-quoted James Madison:
Predictably, this mantra has been corrupted over time, resulting in this 60 Minutes story.
But this type of enticement or temptation happens all the time, even with people who are not in political office.
For example, about one-third of all lotto winners go broke only a short time after winning. What’s the reason?
Until individuals win the lotto, they are subject to external controls. They may have wanted to blow all their money on big houses, nice cars, and fancy clothes, but they had to eat. They literally could not afford to spend foolishly.
But once they win the lottery, that external control of not having enough money has been removed. Now they have all the money in the world, or so they think. All that is left is internal controls, or in other words, their own will power to control their spending. If they did not have sound money management skills before, those internal controls are most likely nonexistent.
At WealthCycles, we invest with the cycle. We believe that we will make more money by investing in precious metals because they are in their cycle. However, if the investor does not have the internal controls in place to control him- or herself, that new money will be for nothing. The investor will end up losing the proceeds because they didn’t know how to manage it.
Just like Congress members, we as investors have to learn to control temptation. External controls will help us in the short term: external controls (laws, regulations, etc.) will help prevent insider trading on Wall Street. But since, as 60 Minutes reports, there are no external controls in D.C., all that are remains are the internal controls of will power and discipline, apparently lacking in many of our elected leaders.
While it’s important to educate yourself on how to recognize a stock or real estate deal, it’s also important to train yourself to be more disciplined. To bring this point home, we’ll leave you with a quote about temptation and self-control from the great investor Warren Buffet: