Investing in Cronyism -- Does it pay? 

Can you get rich betting on companies who are close to Obama?

I've always suspected that this is a dangerous game because of the fickleness of politicians and the tendency of government intervention to provide only short-term benefits.

Ira Stoll, at the "Future of Capitalism" blog decided to measure the question through an experiment, creating the "Crony Capitalism Index" consisting of companies whose executives are tight with the President.

His findings:

The results? An investment in the companies whose executives President Obama appointed to the President's Economic Advisory Board back on February 6, 2009 — UBS, GE, Caterpillar and Oracle — would have gained 151%, far outperforming the broader stock market during this period, which rose 52%, as measured by the S&P 500 Index.

Investing in the companies whose executives attended President Obama's first state dinner, in honor of Prime Minister Singh of India, on November 24, 2009, would have also outperformed the market by a large margin. Shares in those firms — GE, PepsiCo, Caterpillar, Honeywell, and Ethan Allen — are up about 54% since then, versus 19% for the S&P 500.

But that outperformance of the market mostly happened in 2009. Here's Stoll's conclusion:

What I find most intriguing in this round of results is that the value of closeness to the White House seems to have subsided in 2010 and 2011 as compared with 2009. Perhaps the election of a Republican House of Representatives has reduced the market value of an executive's relationship with President Obama. Or perhaps it's time to devise a Crony Capitalist Index that measures a company's relations with Speaker Boehner.

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Timothy P. Carney

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