Gamestop and Dogecoin are passé. The world of internet memes – “fast-spreading internet jokes” - has a new hobbyhorse: Nancy Pelosi. The buying and selling of shares by the “Queen of Stocks”, as the Speaker of the US House of Representatives is called on financial meme pages and TikTok accounts, is being closely watched by retail investors.
The reason is the suspicion that Nancy Pelosi (and her husband) have found the holy grail of successful investment strategies. But is this assumption of young, actively trading investors true?
Research by the Netherlands Authority for the Financial Markets (AFM) shows that more and more younger investors are entering the capital markets. More than half of the starting investors are between 18 and 34 years old, and the risk appetite is increasing. F&C Investment Trust found that one in six UK 18-23 year olds made their first investment in the 12 months to May 2021.
More than half of these Gen Z investors trade in so-called meme-stocks and follow investment advice directly from social media outlets such as Reddit and TikTok. On the same media, the advice now reads: “copy the investments of US Congressmen”.
Mr and Mrs Pelosi
American legislation, which forces members of parliament to disclose their trading activities and those of their families within 45 days, has exposed a series of extremely successful transactions by Nancy Pelosi. But the trading activities of Pelosi’s husband, venture capitalist Paul Pelosi, are particularly conspicuous. His trades were in the news in July, when he earned about $5.3 million by buying 4,000 shares of Google’s parent company Alphabet through call options.
This transaction was highly controversial as it took place just before the so-called Judiciary Committee of the House of Representatives voted on the antitrust legislation. Although this law ultimately turned out not to be a major threat to the tech giants, the couple (with an estimated wealth of $315 million) is accused of insider trading. Nancy Pelosi (pictured) has denied that she had anything to do with the call options placed by her husband.
Financial social media apps, such as Iris, allow investors to follow the transaction reports of parliamentarians in real time. Iris founder Chris Joseph, for example, has said that he also invests personally when he sees which stocks are being picked. “If you can’t beat them, join them,” Joseph recently told US financial news site NPR in an interview. “If I see trading picking up on stocks listed in the register, I buy them in most cases.”
Politicians are not brilliant investors
However, academic research shows that following parliamentarians in their investments is a risky strategy. The suggestion that US politicians can time the market better on the basis of insider information has yet to be scientifically proven. Research by the National Bureau of Economic Research (NBER) into the stock trading returns of US senators from 2012 to March 2020 shows that stocks bought by senators on average underperformed stocks in the same sector and size (market capitalisation) by 11 basis points, 28 basis points and 17 basis points over the time horizon of 1, 3 and 6 months respectively.
“We find no evidence that senators are able to pick stocks for a specific sector in relation to their committee duties. Neither Republican nor Democratic senators are adept at picking the right stocks to buy.” Sold stocks also show negligible underperformance, according to NBER researchers. “We find no evidence that senators are able to pick stocks for a specific sector in connection with their committee duties.”
Internet hypes are risky
The impact of social media-driven trading has been evident on several occasions over the past year. Shares of memes such as GameStop surged this year due to their cult followers online, and cryptocurrencies such as Dogecoin surged wildly in response to tweets from influential figures such as billionaire Elon Musk. Financial watchdogs worldwide, including the Netherlands Authority for the Financial Markets (AFM), have announced that they are closely monitoring these developments and warning investors about the risks of hypes.
Some critics blame influencers for fuelling this unprecedented volatility. In a recent speech, Nikhil Rathi, the chief executive of the Financial Conduct Authority - the UK equivalent of the Dutch AFM - said the rise of crypto investments and the GameStop incident suggest that “more and more investors are viewing investing as entertainment and, encouraged by anonymous influencers on social media, are acting less rationally and more emotionally.”