Invest like a Congress member (Encore)

Summary

Summary of "Invest like a Congress Member (Encore)"

Podcast: The Indicator from Planet Money
Host/Author: NPR
Release Date: December 30, 2024

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Introduction: Exploring Congressional Investments

In this encore episode of The Indicator from Planet Money, hosts Darienne Woods and Waylon Wong delve into the intriguing world of how Democratic and Republican members of the U.S. Congress invest their money. Joined by NPR's congressional correspondent Deirdre Walsh, the episode examines whether these legislators are adept investors and what their strategies reveal about the political and economic landscapes.

Creating the Congressional ETFs: Nance and Cruz

Deirdre Walsh introduces the concept of two specialized Exchange Traded Funds (ETFs) designed to mirror the investment choices of Congress members:

• Nance ETF: Named after former Speaker Nancy Pelosi, this fund tracks the trades of Democratic legislators.
• Cruz ETF: Named after Republican Senator Ted Cruz, this fund mirrors the investment patterns of Republican lawmakers.

These ETFs were developed by a trader known as Unusual, who leverages publicly available disclosure forms detailing the trades of lawmakers, their spouses, and dependent children. The intent is to provide everyday investors with a means to invest similarly to Congress members.

Deirdre Walsh [00:56]: "He has created two separate ETFs, exchange traded funds, that are modeled on the trades by members of Congress."

The Investment Experiment: Putting Theory to Test

In a hands-on segment, Darienne and Waylon decide to invest in both ETFs to observe their performance over time. They each allocate approximately $77 to purchase one share of each ETF:

• Nance ETF (NANC): Priced at just over $35 per share.
• Cruz ETF (KRUZ): Priced at nearly $30 per share.

Waylon Wong [02:13]: "I think we're gonna get rich, Darian."

Analyzing ETF Holdings and Strategies

As the hosts examine the composition of each ETF, stark differences emerge between the investment strategies of Democratic and Republican lawmakers:

• Cruz ETF:

  • Oil and Gas: Constitutes about 11% of the portfolio.
  • Software: 6.2%

• Nance ETF:

  • Oil and Gas: A mere 0.65%.
  • Software: Dominates with 17.5%.
  • Other Sectors: Includes pharmaceuticals, retail, and insurance.

These disparities highlight the partisan preferences in investment sectors, with Democrats showing a significant inclination towards software and technology, whereas Republicans favor energy-related industries.

Darienne Woods [05:16]: "Democratic congresspeople love software, but Republicans less so."

Performance Metrics: Outperforming and Underperforming

When reviewing the performance metrics up to mid-June:

• Nance ETF: Up by 20%, outperforming the S&P 500 by approximately 5 percentage points.
• Cruz ETF: Increased by 9%, falling short of the S&P 500's growth.

This raises questions about the effectiveness of congressional trading strategies and whether politicians might be leveraging insider information for financial gain.

Darienne Woods [05:52]: "Well, I'm feeling good about my investment because the trading based on Democratic lawmakers and their families is up 20% in the year to mid June."

Ethical Implications: Insider Trading Concerns

The episode transitions to the ethical debate surrounding Congressional stock trading. Josh Graham Lynn, CEO and co-founder of Represent Us, advocates for stricter regulations:

Josh Graham Lynn [06:34]: "Members of Congress who are serving the American people simply shouldn't be in a position to trade individual stocks."

He supports the Ending Trading and Holdings in Congressional Stocks Act (ETH Act), which aims to prohibit members of Congress from trading individual stocks to prevent conflicts of interest and preserve public trust.

Josh Graham Lynn [07:17]: "It's when there's a perception of conflict of interest or perception of insider trading, that's what's really damaging to both Congress's credibility and the American people's trust in our political system."

Research Insights: Do Congress Members’ Trades Outperform?

Economist Bruce Sasadote from Dartmouth College provides empirical evidence addressing these concerns. Analyzing congressional trades from 2012 to 2020, his research indicates that:

• Average Performance: Congressional trades, as a group, underperform the market.
• Comparative Analysis: Even whimsical methods, such as training reindeer to pick stocks, yield better results than Congressional trading activities.

Bruce Sasadote [07:43]: "On average, they do average. You know, stuff that they sell sometimes goes up, stuff that they buy goes up, down."

Bruce Sasadote [08:19]: "No, absolutely not."

In a humorous addition, Sasadote recounts an experiment where reindeer were used to select stocks by walking across Wall Street Journal pages, further emphasizing the lackluster performance of Congressional trading.

Bruce Sasadote [08:40]: "They use the point of the hoof to decide which stock they were buying."

Public Trust and Legislative Action

Despite the findings suggesting that Congressional trading is not systematically advantageous, Josh Graham Lynn remains steadfast in his advocacy for the ETH Act. Drawing parallels to other industries, he argues that even if politicians are not maliciously exploiting insider information, the mere possibility erodes public trust.

Josh Graham Lynn [09:42]: "If you had an NBA player who was bad at rigging the rules in favor of their team, would you still let them rig the rules in favor of their team? Of course not."

Results of the Investment Experiment

Concluding the episode, Darienne and Waylon revisit their initial investment in the Nance and Cruz ETFs after six months:

• Nance ETF: Grew from $77.35 to $81.91 (+$4.56).
• Cruz ETF: Increased to $79.12 (+$2.77).

However, both ETFs still underperformed compared to the S&P 500 index, underscoring the earlier research findings that Congressional trading does not necessarily lead to superior investment returns.

Darienne Woods [10:02]: "Nance or Nancy outperformed, formed Cruise. Nance grew at a higher rate, bringing in $4.56. Cruise brought in $2.77. Both did worse than the S&P 500 index."

Conclusion: Balancing Trust and Transparency

The episode wraps up by highlighting the importance of transparency in Congressional investments to maintain public trust. While Congressional trading does not appear to provide systemic financial advantages, the perception of potential conflicts of interest remains a significant concern that legislative measures like the ETH Act aim to address.

Darienne Woods [07:26]: "Not so good. And with the stock trading they're doing, it would be good to know the reality. Like, are politicians systemically making outsized gains on their stock trading?"

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Notable Quotes

• Waylon Wong [02:13]: "I think we're gonna get rich, Darian."
• Josh Graham Lynn [06:34]: "Members of Congress who are serving the American people simply shouldn't be in a position to trade individual stocks."
• Bruce Sasadote [08:40]: "They used the point of the hoof to decide which stock they were buying."

Key Takeaways

• Congressional ETFs: Nance (Democrats) and Cruz (Republicans) offer insights into partisan investment strategies.
• Investment Performance: Democratic-aligned investments outperformed Republicans but both lagged behind the broader market.
• Ethical Concerns: Potential conflicts of interest necessitate legislative action to ban individual stock trading by Congress members.
• Research Evidence: Academic studies indicate Congress trading is not systematically superior to the market, reinforcing calls for transparency and regulation.

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This comprehensive exploration provides listeners with a nuanced understanding of the intersection between politics and finance, emphasizing the need for ethical standards and transparency in public office.

Transcript

[Darienne Woods]

Hey, indicated listeners, Darrine woods here. This week we are running our favourite episodes of the year. Today's episode explores how Democratic and Republican members of Congress invest and whether they're any good at it. We'll have a small update for you at the end.

[Deirdre Walsh]

Npr.

[Waylon Wong]

This is the indicator from Planet Money. I'm Waylon Wong.

[Darienne Woods]

And I'm Darienne Woods. And we have NPR's congressional correspondent Deirdre Walsh with us today. She's dialing in from the House of Representatives. Hi, Deirdre.

[Deirdre Walsh]

Hey there, Deirdre.

[Waylon Wong]

The stock market is on a tear right now and you reported this story that caught our attention about a company that partnered with the financial firm Subversive to allow everyday people to invest like members of Congress.

[Deirdre Walsh]

Right. So this was initially created by a trader who calls himself Unusual.

[Darienne Woods]

Whales love the name.

[Deirdre Walsh]

He has created two separate ETFs, exchange traded funds. Right. That are modeled on the trades by members of Congress. So he's using publicly available forms, disclosure forms by these lawmakers or their spouses and dependent children's trades to Model 1 ETF called Nance, which is modeled on Democratic lawmakers trades named after former Speaker Nancy Pelosi.

[Waylon Wong]

So casual Nance.

[Deirdre Walsh]

And another ETF called Cruz, after Republican Texas Senator Ted Cruz.

[Darienne Woods]

Very good.

[Deirdre Walsh]

To show how the two different parties investment strategies are working in the market.

[Waylon Wong]

Darian, today on the show, you and I are going to invest in these two exchange traded funds, as in these funds that track a range of different companies. One of us will go with Nance, comprising companies held by Democratic members of Congress and the other will go the cruise direction, companies held by Republicans.

[Darienne Woods]

And as we do this, we'll also consider whether politicians should even be allowed to play the market.

[Waylon Wong]

So Deirdre, how do you think we're gonna do?

[Deirdre Walsh]

I think you're gonna do really well based on the past experience of these funds.

[Darienne Woods]

Well, past performance is no indication of future performance.

[Waylon Wong]

No, no. I think we're gonna get rich, Darian.

[Darienne Woods]

If you can't beat him, join him.

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[Darienne Woods]

All right, so Waylon, I now have here the Planet Money investment fund. It's a very sophisticated jar.

[Waylon Wong]

Oh, there's actually stuff in it because, you know, the Planet Money stock trading experiments have not got the that well in the past. Let's just say.

[Darienne Woods]

Yeah, the origin was in 2010 when the planet Money team bought a toxic asset. Needless to say, that didn't go so well.

[Waylon Wong]

Okay, should we count out how much we have to fritter away on this new experiment we're doing?

[Darienne Woods]

Invest, invest, not fritter. We have 50, 60, 73, 74, 75, 76, $77. And I say a quarter and a dime.

[Waylon Wong]

Nice.

[Darienne Woods]

$77.35.

[Waylon Wong]

That's a great amount of capital to start with.

[Darienne Woods]

Now this should be enough to buy these exchange traded funds that are based on Congress members trading. As we're taping now, one share of Nance or NANC is going for a little over $35 a share.

[Waylon Wong]

And then Kruz with a K, K, R, U, Z, it is almost $30. So we'll each buy one share and we'll check back in a week to see how we did.

[Darienne Woods]

Wait, Waylon, what did we actually invest in?

[Waylon Wong]

Yeah, so I'm just taking a scroll through this portfolio. I'm looking at what's in the cruise etf. And the biggest category of holdings is actually oil and gas. So almost 11% of the cruise ETF is in oil, gas and consumable fuels.

[Darienne Woods]

I'm going to look at the Democratic one on the Nancy Nance ETF. I'm seeing oil, gas and consumable fuels is actually 0.65%. So basically less than a percent. Oh, gosh, very little. What about software? Yeah, mine is 6.2%, mine is 17.5%. So Democratic congresspeople love software, but Republicans less so.

[Waylon Wong]

Oh, that's really Interesting.

[Darienne Woods]

Yeah. And on the Dems list, I also see pharmaceuticals, retail insurance.

[Waylon Wong]

Yep, same here. Investments all over the economy.

[Darienne Woods]

Well, I'm feeling good about my investment because the trading based on Democratic lawmakers and their families is up 20% in the year to mid June. And that's about 5 percentage points more than the S&P 500, which is a reasonable proxy for the overall US stock market.

[Waylon Wong]

Cruz hasn't done as well. Those Republican lawmakers. Trades are on average up only 9%. Not as good as the stock market as a whole. But regardless, this raises the question of whether politicians are using inside information to profit from the stock market.

[Darienne Woods]

Yeah, Josh Graham Lynn is the CEO and co founder of Represent Us, which is an anti corruption advocacy group. And he does not like the status quo.

[Josh Graham Lynn]

Members of Congress who are serving the American people simply shouldn't be in a position to trade individual stocks.

[Waylon Wong]

Josh supports a bill to ban this trading. This one is called the Ending Trading and Holdings in Congressional Stocks act, or the ETH Act.

[Darienne Woods]

Very clever.

[Waylon Wong]

Now, Josh is okay with members of Congress investing in funds where they're tracking an overall rise in the market, just not trading individual companies.

[Josh Graham Lynn]

I don't think anybody wants to limit members of Congress from making investments and having a positive retirement ahead of them. It's when there's a perception of conflict of interest or perception of insider trading, that's what's really damaging to both Congress's credibility and the American people's trust in our political system.

[Darienne Woods]

Just 16% of Americans surveyed by the Pew Research center say they trust the government to do what's right just about always or most of the time.

[Waylon Wong]

Oh, geez, that's really low. 16%.

[Darienne Woods]

Not so good. And with the stock trading they're doing, it would be good to know the reality. Like, are politicians systemically making outsized gains on their stock trading?

[Bruce Sasadote]

Short answer is no, absolutely not.

[Darienne Woods]

Bruce Sasadote is a professor of economics at Dartmouth College, and he and his co authors tallied all the congressional trades from 2012 to late 2020.

[Bruce Sasadote]

On average. They do average. You know, stuff that they sell sometimes goes up, stuff that they buy goes up, down. And in our paper, they, as a group, underperform.

[Waylon Wong]

Bruce is not saying corruption in regards to trading never occurs. It just doesn't appear to be systemic. He finds even the 1% of traders don't look any different from stocks randomly picked. Like the proverbial monkeys throwing darts at a dartboard.

[Darienne Woods]

Now, Bruce didn't test monkeys with darts, but he did test reindeer.

[Waylon Wong]

Actual reindeer.

[Darienne Woods]

Yes. Bruce and his college Student co authors did some further research where they literally went to a Christmas style theme park called Santa's Village, and they got reindeer to pick stocks by walking on pages of the Wall Street Journal.

[Bruce Sasadote]

So they used the point of the hoof to decide which stock they were buying.

[Darienne Woods]

Wow. So you actually did this? I was reading the paper and I wasn't sure if this was just a Christmas parody, but you actually got the reindeers to pick stocks.

[Bruce Sasadote]

Absolutely. And you know, some of my favorite parts of the paper where we point out that they exhibit herding behavior and that they're good at sniffing out new trends.

[Darienne Woods]

Bruce does say there's a serious point here.

[Bruce Sasadote]

The reindeer outperform the congresspeople and the senators on average, especially in a finite time horizon. And a couple of good picks dominate everything. And that point might carry over to the recent conversations about congressional leaders doing so well. Because you have this idea that, well, maybe Nancy Pelosi is really killing it in Nvidia and other tech stocks. But you have to ask yourself, okay, is that really inside information, or is it that she represents a district that has a lot of tech companies and when tech companies are doing well, she and her husband Paul are doing well.

[Waylon Wong]

So we asked Josh, the advocate for bans on congressional stock trading, whether this kind of evidence made him rethink his position.

[Josh Graham Lynn]

I don't think so. I mean, think of it this way. If you had an NBA player who was bad at rigging the rules in favor of their team, would you still let them rig the rules in favor of their team? Of course not.

[Waylon Wong]

Maybe this ethics bill would protect congresspeople from their own bad stock picks.

[Darienne Woods]

It's been six months since we made this episode. And now for the results of our experiment. Nance or Nancy outperformed, formed Cruise. Nantes grew at a higher rate, bringing in $4.56. Cruise brought in $2.77. Both did worse than the S&P 500 index. Our after tax gains will be transferred over to the Planet Money Investment Fund. Now. This episode was produced by Julia Ritchie with engineering by Kwesi Lee. It was fact checked by Cierra Juarez. Cake and Cannon edits the show. And the indicator is a production of npr.

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