Politicians Are Ripping You Off.

In late 2023, Congresswoman Nancy Pelosi and her venture capitalist husband made a significant investment in Nvidia, a company known for its work in artificial intelligence and semiconductors, and also known for being the S&P 500's best performing stock in 2023. Rising 239 on the 22nd of November, she bought 50 call options on Nvidia stock with a strike price of $120, expiring on December 20th, 2024. Call options are bets that the price of a stock will rise past a certain point in a certain period of time. The more it rises past that point, the more you profit.

So, the total value of Pelosi's investment ranged between $1 and $5 million. But the crazy thing is, fast forward just two months after her trade, and Nvidia shares have skyrocketed up 25%, pushing new all-time highs and making Pelosi's options worth a hell of a lot of money. But this again brings into question the ethics of congressional stock trading, especially when it comes to buying shares in companies directly related to the very legislation that the representatives are voting on. Because the results are getting egregious.

If we take a look at 2023, you can see 32 congressmen or women beat the S&P 500, which itself had a phenomenal year, rising 24.8%. So beating the market last year is, in itself, very improbable, yet members of Congress seem to do it no problem. As you can see, Nancy Pelosi sits in ninth place with a return of 65.5%. That's literally better performance than the world's best investors. Even Warren Buffett managed only 16% in his company Berkshire Hathaway in 2023. That's how hard it was to beat the market last year.

So, yes, politicians are now beating the world's best investors. But the annoying thing is just how quick they are to dismiss the idea that maybe this congressional stock trading is a little bit unfair. This is the famous clip of how Nancy Pelosi responded after being asked whether congressional stock trading should potentially be banned:

"Insider just completed a 5-month investigation by that 49 members of Congress and 182 senior Congressional staffers have violated the stock act, the insider trading law. I'm wondering if you have any reaction to that, and secondly, should members of Congress and their spouses be banned from trading individual stocks while serving in Congress?"

"No, I don't. No to the second one. We have a responsibility to report in the stock on the stock, but I don't. I'm not familiar with that five-month review, but if the people aren't reporting, they should be because this is a free market. We’re a free market economy; they should be able to participate in that. We have a free market economy, and people should be able to participate in that."

In other words, we're getting filthy rich off this system. We certainly don't want to change the rules. And it's unfortunately true they are getting filthy rich each year. Stock trading oftentimes makes members of Congress multiple times their salaries. I mean, Nancy Pelosi's annual salary is $223,500, but even this one Nvidia trade alone could have made her over double that in the space of just a few months.

Now, I want to preface this video by just highlighting that I am not getting at all political in this video. I have no political affiliation in the United States; I'm not even from the United States. But I do like to call out dodgy stuff going on in financial markets when I see it. And when you start to look back over the history of congressional stock trading, you realize just how much profiteering has really been going on.

Nancy Pelosi is, funnily enough, the classic example. Unfortunately, she does have a long history of conflicts of interest and questionable stock trades. Most people won't remember this, but her questionable trading activity actually dates all the way back to 2008. In 2008, she bought $220,000 of Visa at its IPO. Okay, good for her; she bought some stock in a great company. But what happened next?

Well, she was found to deliberately stall a bill that would put an end to swipe fees that would negatively impact Visa's share price. She literally used her political power to try and benefit a stock in her investment portfolio. Interestingly, this particular trade actually triggered lawmakers to write in what is colloquially known as the "Pelosi provision" into the stock act. The Stock Act, or the Stop Trading on Congressional Knowledge Act, was passed into law in 2012, and actually aimed to stop this kind of behavior back during the global financial crisis.

Insider trading within U.S. Congress was actually fairly common, and in 2008 and 2009, as it all came to a head, many politicians were found to be enriching themselves through their investments at a time when the average American had their retirement accounts halved. So, this activity naturally caused a bit of an uproar, and ultimately it led to the Stock Act being passed in 2012, which drastically increased the reporting requirements for stock trading by members of Congress and made it clear that, quote, "there exists no exemption for members of Congress, Congressional employees, or for other federal officers or employees from the insider trading prohibitions in federal Securities Law and Regulation."

To be fair, this act did help tidy up the fully-fledged insider trading. A 2004 study of the outcomes of stock trading by United States senators during the 1990s found that senators, on average, beat the market by 12% a year, whereas a study by Dartmouth College found that the specific stocks that members of Congress reported buying and selling between 2012 and 2020 did not, on average, perform any better or worse than other similar stocks. They noted that House and Senate stock returns are consistent with random stock picking.

So it did clean things up a bit, and now, of course, politicians have to report all stock trading activity. But despite these new reporting requirements and tightening up the rules on what is and isn't allowed, the one thing that the Stock Act did not ban was congressional stock trading itself, which still allows there to be conflicts of interest. If we don't let athletes bet on games they have the ability to influence, why do we let Congress invest in companies they regulate?

This is probably the thing that annoys people the most. It's not actually the fact that they can buy and sell shares; it's the fact that there are huge conflicts of interests. These politicians are elected to act in a way that represents the voice of the people; that's the whole point of the job. But if the thing that is best for the people might be worse for their own stock portfolios, well, that obviously creates a conflict of interest, and that's where the problems arise.

Why ban members of Congress from trading stocks? Because it appears to be unethical, and it is wrong fundamentally. The American people know it's wrong. The American people expect members of Congress to be serving the American people and the American public, and not their stock portfolios. We have to be able to assure the American people that they don't have to worry about if they're competing with their member of Congress's stock portfolio in order to be heard.

For example, The New York Times found in September of '22 that from 2019 to 2021, 183 current senators or representatives reported a trade of stock or other financial assets by themselves or an immediate family member, and more than half of them, 97 of them, sat on Congressional committees that potentially gave them insight into the companies whose shares they reported buying or selling. Senator Tommy Tuberville, Republican of Alabama and member of the Agriculture Committee, regularly reported buying and selling contracts tied to cattle prices, even as the panel by Mr. Tuberville's own account had been talking about the cattle markets.

Representative Bob Gibbs, an Ohio Republican on the House Oversight Committee, reported buying shares of the pharmaceutical company AbbVie in 2020 and 2021 while the committee was investigating AbbVie and five other rivals over high drug prices. You reckon he's going to vote for new laws that might benefit the broader public at AbbVie’s expense? Yeah, yeah, I don't think so.

So the fact that they obviously act on insider knowledge is very annoying, but I'd say the worst thing is that congressional stock trading very much interferes with voting. Nancy Pelosi, last year, for example, owned Nvidia shares and call options at the time that the Chips Act was being voted on. The Chips Act, officially known as the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022, was passed in July last year and signed into law by Joe Biden in August.

But what did this law support? Well, the law aims to catalyze investments in domestic semiconductor manufacturing capacity and jump-start research and development in technologies like quantum computing, clean energy, nanotechnology, and artificial intelligence. Right up Nvidia's alley. But would you look at this? Who was it that bought $1 million worth of Nvidia shares the day before the Senate was scheduled to vote on the Chips Act? You'll never guess. It was Nancy Pelosi's husband, Paul.

Setting aside the actual contents of the Chips Act, do you reckon Nancy was going to vote for or against it? Yeah, she backed it. "You know, we signed up for this job; we knew what the pay was. It isn't, um, we're going to pay you this much plus corruption."

"Have you both become aware of colleagues of yours that are bending the rules with their trades?"

"Look, I'm going to keep this bipartisan. I am not going to go into some names. We both know the names of some people that have made millions of dollars off of trading—spouses trading stocks while committee hearings are going on."

So long story short, it's probably not the best for the United States to continue to allow congressional stock trading. But can we use this information to our advantage? If you can't beat them, join them, right? Well, as part of the Stock Act, members of Congress have 30 days to report their stock trades over $1,000 in value and 45 days if the trade was made by a spouse or dependent child.

So what if you simply waited to see what people like Nancy Pelosi were buying and then jumped on board? Well, believe it or not, this has actually become quite the strategy on Finance Twitter and Reddit, with accounts like Nancy Pelosi Stock Tracker blowing up to over 390,000 followers. But the question is, does the strategy actually work?

Well, it is a bit of a mixed bag. Firstly, in the case of Nancy Pelosi, because her trades are executed by her husband Paul, she does get up to 45 days to report what she's bought or sold, in which time prices of the securities could well have shifted quite dramatically, changing the outlook of a potential investment. While Nvidia was fairly flat between her last purchase and disclosure dates, if she, say, bought Nvidia a month ago and was only disclosing it now, well, there'd be a 23% difference in the stock price. That obviously changes everything.

It's also worth noting that a lot of Pelosi's trades are options bets, which makes her moves even harder to replicate after 45 days of waiting. So overall, I'm personally not in favor of copying these strategies. It's the same with the world's best investors. We get to see the portfolios of the world's best investors 45 days after the end of each quarter, but it is a foolish strategy to blindly copy them.

Instead, a much better idea is to simply use these filings for ideas. For example, if you worked in the oil industry and you notice that Warren Buffett bought a ton of Chevron stock, you wouldn't just buy it straight away, but you might go and research what's going on. Same thing with Pelosi; if you see her buying a whole bunch of Nvidia, this shouldn't be a cue to jump in headfirst, rather a hint that maybe you might want to research it further and maybe check whether there's likely to be a fundamental change in their business or valuation based on, say, a vote of upcoming legislation.

There are other things to consider as well. One is that sometimes these Congress people don't actually do that well. You know, while it seems odd that so many of them beat the market last year—Pelosi included—Nancy and Paul's track record is far from pristine. In fact, during 2022, when Nancy and her husband previously dabbled in the old Nvidia stock, it didn't go too well for them. The Pelosis sold out of their shares and call options in Nvidia mid-2022 at a $700,000 loss, and the timing couldn't have been worse. After they sold, the shares proceeded to rise almost 200%.

It's also worth remembering that technically these are the trades of Paul Pelosi and being a fund manager himself, there is a chance that he's just acting based on his firm's own research as opposed to insider knowledge from Nancy herself. But I will tell you the one thing that will help improve the returns of your stock portfolio: that is the Introduction to Stock Analysis over on New Money Education. This is a 6-hour video course that goes step by step through the whole value investing strategy and includes tutorials on things such as reading financial statements and includes three full valuation methods as well.

So, you can use the code SAVE50 to score yourself a $50 discount right now. All sales also support the free content that you see here on the channel, so thank you if you do decide to sign up. But with that said, definitely let me know what you think of congressional stock trading down in the comments below. Should it be allowed? Should it be banned? Let me know. Also, leave a like if you enjoyed, and with that said, guys, I'll see you in the next video.