Paul Pelosi – husband of Nancy – made millions buying Tesla call options one month before an executive order requiring government vehicles to be electric. Rep. Alan Lowenthal – who sits on multiple House committees for energy and resource conservation – is up 340% on his investment in solar company Sunrun Inc. And Richard Burr, chairman of the Senate Intelligence Committee, sold nearly his entire portfolio days before publicly revealing the threat of the COVID outbreak.
Hmmm… is there a vast insider-trading conspiracy in Congress, or do our politicians just have good business sense? And in either case, is there a way for us to get a piece of the action?
Does Congress have an unfair advantage?
Obviously, our elected representatives know a lot of stuff that we don’t. But the good news is that they are required to publicly disclose their trading activity, which means we can see pretty clearly when it correlates with their legislative activity. After all, how else would I make the connection between Rep. Lowenthal’s committee appointments and his Sunrun holdings?
But as any statistician worth his salt will tell you, correlation does not prove causation! While the examples above sure look like they count as illegal insider trading, proving that they do is pretty difficult. And for every truly suspicious example, there’s a bevy of lame ones that conspiracy theorists blow out of proportion. Here’s a favorite of mine:
“The U.S. Army first announced a $22 billion augmented reality deal with Microsoft (MSFT) on March 31, 2021 and reiterated its commitment to this partnership in October. Speaker Nancy Pelosi disclosed exercising 150 calls on March 19th, 2021 at a strike price of $130. She is up 160%”
Sounds sketchy at first. But if you’re familiar with call options, you know that exercising them is way different from buying regular shares and involves a lot more variables. While it’s certainly possible that Pelosi was putting big money on Microsoft because of an impending Army contract, that’s hardly the only explanation.
Regardless of why she made the trade, however, a 160% return is nothing to sniff at. Speaking of which…
If you can’t beat ‘em… join ‘em?
Like legislators, most big names in finance are required to publicly disclose their investment decisions. That means we little people can mooch off their success, at least to an extent, by mimicking their trades. This is known as coat-tailing, and many investors do it with the likes of hedge fund managers, banking execs and, yes, politicians.
Of course, you have to pick the right people to mimic in order for it to work. While some senators and representatives might be a good choice, many of them don’t trade at all; and of those who do, some appear to be bad at it. Like, very bad. So telling the duds apart from the whiz kids is a critical – but tricky – task.
Although politicians are required to disclose individual trades, they don’t have to say exactly how big those transactions are – they just put them in a range. Remember, too, that the trades they make while in office don’t tell us anything about the rest of their portfolio. Without that context, it’s hard to tell exactly how risky or beneficial any one transaction is, which then makes it hard to imitate their strategy.
Still, many resources are available that synthesize all this data and attempt to make up for its shortcomings – I’ve listed a few below. If you’re willing to wade through a lot of charts, you might find a few legislators who regularly anticipate market trends with their trading activity. Although I wouldn’t blindly follow in their footsteps, you could learn a lot from keeping an eye on them.