Transcription
Has it ever happened to you to change jobs, to take on a new job, whether within your company or in a new company, and suddenly see your stock market performance explode? When I say explode, I mean that before you had, for example, quite standard performance in line with what the stock market does, and then from one day to the next, you have exceptional performance, better than Warren Buffett, better than the best traders, fund managers, and so on, and this really from one day to the next.
So it seems completely crazy, completely delusional, but there is a type of position in which this happens, and that is simply American politicians. So I thank Steve in passing for sending me this fascinating study. Of course, as usual, I'll put the link in the description of this video. Studies by researchers who analyzed all the stock market transactions of Congress and they discovered something crazy. American elected officials are not good investors, but that's not what's crazy. On average, they perform rather worse than the market. Except for a very special category of American politicians, the leaders. And for them, the difference is spectacular. Before their rise, their performance is totally banal, about the same as their colleagues. And after their rise, they outperform their colleagues by 47 points per year. Yes, 47 points per year. I repeat this because when I read the study, I really had to reread it several times to see that it was indeed the correct figure and that there was no error.
So, I will quickly, as you may not know the American system well, and in any case, I am not a specialist, I will briefly talk about the leaders again. What I call a leader is really the people who are at the top of Congress. So we will have the speaker who will control the agenda and decide which law comes to a vote. We also have the party leaders who will set political priorities. And finally, we will have the whips, those who know exactly who will vote, what, and when. So, in short, it is a small number of individuals who are not content to follow the agenda, but who are really the ones who will write the agenda of Congress. And necessarily, when you write the rules of the game, investing becomes a little bit easier.
Just to be clear about the figures we are talking about, before the rise of these famous leaders, their performance is normal, and afterwards they make 47 points more per year. This means that if their colleagues were making 10% annually on the stock market, they are making 57% performance per year. That's what we call 47 points more. So it's completely delusional. We are not just talking about a politician who had a flair for Nvidia or Palantir. We are really talking about a structural advantage that is linked to their position. An advantage that you, that I, that all investors watching this video obviously will never have.
First, perhaps a few words about the context. In the United States, elected officials have every right to buy and sell stocks. It is legal. They simply have to declare their transactions. And each year, about a hundred members of Congress trade the equivalent of a hundred million dollars in assets. So, up to this point, nothing shocking. It is legal, it is provided for by law, they have the right to do so. But for several years, we have seen scandals erupt around these transactions by American politicians. We have seen some politicians who sold stocks just after confidential briefings on Covid to know whether there would be a lockdown or not. Others bought in sectors they directly supervise. But all of that, in the end, is nothing compared to what we observe when we look at the leaders. I really make a distinction between American men and women politicians and then on the other hand the leaders because that's where the figures become completely delusional.
We talked about these 47 points because when a member of Congress becomes a leader, they gain access to three very valuable things. The first is the legislative agenda. They are the ones who will choose which law comes to the floor. And that alone is a goldmine of information. The second is the ability to influence the schedule, the party's priorities, to postpone a law so that it is voted on 6 months later, and so on. And the third is access to all internal discussions. And the researchers did something clever. They compared the results of the transactions of these leaders to the transactions of similar elected officials. So same age, same party, same year of entry into Congress, same seniority, and so on. And before their rise, both groups have exactly the same results. So it's not that the leaders are particularly intelligent and therefore became leaders because they are intelligent and earn more on the stock market because they are intelligent or talented or better at finance. It's simply that before, they didn't yet have the right information.
And what is even more striking is that this outperformance appears precisely at the moment they become leaders. It's not as if there was any doubt, it's not as if it appeared 6 months later, 1 year later, and so on. No, no, it's really a clear shift as if, on the date of their taking office, someone had suddenly pressed an expert button and then, voilà, they became top investors overnight.
But then, how do they make money? And that's where it's interesting, because the study went through transaction by transaction to see what the mechanisms were. And the first mechanism is a political channel, meaning that a congressional leader decides which bill comes to a vote and especially when. So they know exactly which regulations are in the pipeline, which sectors will be favored, and which will be completely crushed by future laws. And this is immediately visible in their trades. For example, researchers have found that when leaders sell a stock, that company is statistically more likely to face investigations, public hearings, or regulatory actions in the following year. This means that leaders manage to sell, as if by magic, before bad news. And this doesn't happen once or twice. No, no, it's systematic. And they don't wait for the announcement to come out. They sell months in advance. And this is obviously not a matter of chance. They have information that is not a week or two weeks in advance. They have information that is months ahead of what is subsequently released publicly.
And there is another fascinating point: when their political party controls the chamber in which they sit, their performance is even better. And it's logical, the more power your side has, the more you control what will happen, and the more precise your investments become. And that's not all. After their purchases, their parties vote more often in a way that benefits the companies they have just acquired. So here, we are no longer just talking about an information advantage. We know what will happen a few months in advance. And no, no, here we are talking about an influence advantage, and sometimes it becomes very concrete. We have certain companies bought by leaders that then, as if by magic, see the value of public contracts they receive increase, and sometimes even public contracts that do not go through tenders but are awarded without competition. This typically happens in defense, in cybersecurity, where the state will award contracts under urgency and ultimately without a tender. And so, as if by magic, after being bought by leaders, they will receive more public contracts.
And of course, how can we talk about the stock market and American politicians without mentioning Nancy Pelosi, who is truly the archetype of someone who has incredible stock market results, probably based on advance information. A small example: her husband Paul Pelosi bought Apple and Alphabet shares, as if by chance, just before Chuck Schumer, the Senate Majority Leader, decided to block two antitrust bills that would have seriously shaken both stocks. Obviously, perfect timing. But as very often, it's impossible to prove anything. But when we look at the thousands of transactions by political leaders, that's where we realize that it's not at all a coincidence. It's really a mix, I said, of access to information and a mix of influence that favors the companies they hold in their portfolios. This first part, therefore, is really the political aspect.
Then there is another channel, which is the more corporate channel. Leaders don't just win thanks to laws, they also win thanks to their relationships with companies. The study shows that once they become leaders, their best trades don't come from just any company. Their best trades come from two types of companies. The first are the companies that finance their campaigns, strangely enough. And the second type of company is companies that are based in their state. Thanks to the companies with which they have the most contacts, regular, sometimes even friendly contacts, they manage to make a lot more money. And researchers have shown that many of the winning transactions correspond to announcements that can only come from within. So, upcoming earnings changes, and so on. And conversely, as if by chance, American politicians cannot anticipate external events like geopolitical crises, media scandals, or industrial accidents. These are unpredictable, they can't do it, they don't have the talent. But everything that comes from within, and which ultimately must be called by its correct name, that is to say, all insider trading, they know how to do very well.
So, I could give you many examples of insider trading, I'll take one because it's really classic and emblematic. Chris Collins, an elected official in Congress, receives an email one day from a CEO during a White House picnic announcing bad news about the company. He calls his son directly, who sells and avoids a loss of over $700,000. He will obviously be convicted of insider trading, and we realize the degree of impunity for receiving an email from a CEO, calling your son, selling immediately, and so on. And one might think that this is exceptional, that it's an isolated slip-up, and so on, but not at all. We realize, and the study shows it well, that it is ultimately a systemic functioning, meaning that leaders talk to leaders almost without filters, and leaders then trade on this information.
So, ultimately, it's not very hidden. The data is there, and the data is extremely clear. They analyzed all transactions, and the number of transactions based on almost insider trading or on information about future laws to be voted on represents a huge mass of leaders' transactions.
Of course, all of this can lead to another question, which is: why is this a problem? One might say, well, good for them, they profit from it, and so on. As long as it doesn't affect me, no problem. Well, maybe in their place, I would do the same thing, and so on, depending on your ethics. Perhaps you can tell yourself that it's not that serious. But it affects me a lot because, yes, it's true, markets have never been perfect. But they are still based on a simple idea: everyone plays with the same information. We are here, we have the same rules of the game, and then, well, we try to do the best we can with all of that. But when we see that some elected officials know the laws before everyone else, have direct contacts with many company executives, are aware of a lot of information, and take advantage of it, then we realize that fairness completely disappears.
And then there is another point that many people forget, which is that these gains, these famous 47% more points than other politicians, are a problem because yes, they massively outperform, but it's thanks to other people who will underperform. That is to say, these performances are at the expense of other investors, therefore at the expense of you and me. It's not direct theft in the sense that they don't take from one pocket to put in theirs, but mathematically the effect is exactly the same. The market has a certain long-term average, and if they manage to beat, and even more than beat, explode this market performance average, it means that many other people are underperforming.
And then, of course, there is another problem, which is that the line between public interest and private interest completely disappears. That is to say, in theory, we know that it's not always true, but in theory, an elected official is supposed to work for the country, much more than for their portfolio. And here, we clearly see a huge conflict of interest since the politician will want to influence not for the common good, which they should do, but to buy their next house in the Hamptons. And then, obviously, there is a problem of trust. How can we ask citizens to be patient, disciplined, to pay attention, things will improve, and so on. We have to play by the rules when some elected officials cheat. And the problem is that cheating is not always frontal and visible, and so on. Very often, it's playing on information heard in a hallway, and so on. So there is a huge gray area.
So you might tell me, "Yes, we need to legislate, indeed, it's not normal, and so on." But that's the most ironic thing about this story: there is already a law that is supposed to control these practices. It's called the STOCK Act. It was adopted in 2012 to limit trading on non-public information. Elected officials must declare their trades within 45 days. So far, so good. And if they don't, they risk a fine of $200. You heard correctly, $200, when most of these trades are hundreds of thousands of dollars, sometimes millions. So, obviously, that's not going to stop anything. And the study is well done because it shows that the leaders' outperformance doesn't even decrease after this law. So before, after, it's the same. In any case, the law is either inadequate or completely ineffective, but in any case, it's useless. And there is almost total impunity today for this kind of abuse.
I'll be honest with you. I hate these kinds of studies because they are really discouraging studies. They discourage individual investors who will start thinking, "Everything is rigged, politicians are all corrupt, the stock markets are rotten, so ultimately I can't do anything on my end." When in reality, that's not at all the message to take away. Yes, it's true, I won't hide it from you, we just saw it with the study. There is a handful of elected officials who profit from privileged information. This study is American, we might have the same thing in Europe. But what I keep in mind is that I tell myself, ultimately, it's only a few dozen people out of millions of investors. And even if their little game continues, and so on, markets year after year continue to reward patience, diversification, discipline. And we don't need a position in Washington to succeed.
Besides, you only have to look at the average stock market performance and realize that it has been very good for several years. So no, you absolutely must not think that to make money on the stock market, you need to know a law before everyone else, that you need to have a seat in the Senate. You just need a simple strategy of regularity, discipline, and time. Because that's the real superpower in the stock market, it's not access to privileged information. And to potentially end up in prison, it's really about staying in the market long enough to let compound interest do its work.
So I hope this video doesn't demoralize you and make you think that the world is doomed, corrupt, and so on, that ultimately even the stock market is to be thrown away with the rest. No, no, there are many things to do in the stock market, including investing for the long term. Tell me what you think about it. Do you think it's the same in Europe? Besides, I have the impression that, in France at least, politicians, when we look at their wealth, are much less focused on the stock market than our famous American politicians. But tell me what you think. Thank you all. Don't hesitate to send me documents like Steve did. Thank you, Steve. This study is super interesting. Don't hesitate to send me, for example, on LinkedIn, that's how Steve contacted me.