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

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

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?"

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.

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.