Everyone's A Trader

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Conflicts of Interest Abound:

Over the past few months there has been a proliferation of public servants being exposed for their investing and trading habits—with every scenario seemingly giving off the appearance of an ethics violation and/or a conflict of interest.

First, there were multiple members of Congress who were dumping stocks at the beginning of the pandemic after being briefed about the seriousness of the Covid situation in January 2020. They were safeguarding their personal finances before their duty to protect public health.

I’m sure exposing them for shady practices stopped Congress from trading. Right?

Of course not.

According to a recent article from NPR:

So far this year, Senate and House members have filed more than 4,000 financial trading disclosures — with at least $315 million of stocks and bonds bought or sold. That's according to Tim Carambat, who in 2020 created and now maintains two public databases of lawmaker financial transactions — House Stock Watcher and Senate Stock Watcher.

$315 million in 2021.

Then there was the fiasco around Nancy Pelosi and her husband. Everyone knows the alpha comes from tracking her portfolio and disclosures.

Among a certain community of individual investors on TikTok, House Speaker Nancy Pelosi's stock trading disclosures are a treasure trove. "Shout out to Nancy Pelosi, the stock market's biggest whale," said user 'ceowatchlist.' Another said, "I've come to the conclusion that Nancy Pelosi is a psychic," while adding that she is the "queen of investing."

Then there was Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren who both recently resigned over their controversies from stock trades (and health—allegedly).

As reported on by NBC:

Controversy had swirled over the issue following disclosures that Kaplan in particular had been executing large-dollar trades in big-name companies such as Amazon, Apple and Delta Air Lines. The Wall Street Journal first reported the trades.

Subsequent to the disclosures, both Kaplan and Rosengren said they would be selling their stocks to avoid the appearance of conflict. Questions were raised because the Fed has conducted trillions of dollars in asset purchases aimed at helping markets function, and has bought corporate bonds from mega-cap companies including Apple.

Kaplan insisted he had done nothing wrong.

“During my tenure, I have adhered to all Federal Reserve ethical standards and policies,” he said in his monthly statement. “My securities investing activities and disclosures met Bank compliance rules and standards.”

I did nothing wrong. But, now I’m going to step down. C’mon man. And while his activities and disclosures may have met the current compliance rules and standards, it’s still a terrible look and needs to be updated.

This weekend, as reported on by the WSJ in an investigative piece, there were 61 federal judges who reported purchases or sales of stock in companies while hearing 170 cases involving those companies from 2010 to 2018. Nearly half of the 61 judges or their families or their advisers made more than one trade while the case was in progress.

Nothing bars judges from owning stocks, but a 1974 federal law prohibits any “ownership of a legal or equitable interest, however small,” in a party to a case before a judge. That law and the Judicial Conference of the U.S., the federal courts’ policy-making body, require judges to avoid even the appearance of a conflict.

The ban on holding even a single share of a company while presiding in a case involving the firm means judges must be vigilant about their assets, including informing themselves about stockholdings of spouses and minor children.

The Judicial Conference requires courts to use conflict-checking computer software to help identify cases where judges should bow out. Judges needn’t disqualify themselves from cases involving banks where they have mortgages or checking or savings accounts, nor do they need to recuse because of any mutual-fund holdings.

Imagine trying defend your case to a judge who may have a financial stake in the outcome of your case.

Out of all the people mentioned previously, do we see a problem here? A conflict of interest perhaps?

Remember that these are public servants. Their duty and priority is to serve us, the people—not prioritizing their financial self interests and potentially harming someone in the process.

There are actually a few simple solutions to this problem.

1. Public servants (and their immediate family members)—specifically those who are elected, set policies or mandates, and may have potential conflicts of interest with publicly (or privately) traded companies—shall never be allowed to purchase individual stocks. Make them buy mutual funds, index funds, or the Bitcoin ETF instead.

2. Set stiff civil penalties.

3. Removal from office from non-compliance.

Passive investing actually fixes this.

Performance Update:

Now let’s see how the People’s Portfolio did this week…

The markets rallied for the 2nd straight week in a row. The stock market seems to have regained its footing after a strong start to corporate earnings season. After the September dip that produced the first 5% pullback of the year, the BTFD boys came out of the woodwork saying enough is enough and bid up equities. New highs feel reachable before Christmas. Maybe that will be our Christmas present since none will be delivered because of supply chain issues.

On Friday, we voted Shopify (SHOP) to remain in the portfolio for another 10 weeks. Our 10-week minimum holds will start to get shorter heading into the end of the year.

Square (SQ) is on the chopping block next week for the 2nd time. We’re currently holding onto a +16.87% unrealized gain over the past 19 weeks.

Keep an eye out for the new Twitter poll every Friday. Follow along in real-time with nearly 300,000 others on Public.

Portfolio News Highlights:

The biggest stories affecting our portfolio this week:

• Coinbase is launching a marketplace for NFTs (CNBC)

• Square Sets Its Sights on Bitcoin Mining (Yahoo)

• Shopify Aims to Make Stores Lean, Mean Retailing Machines (Yahoo)

What Else We’re Reading:

Blogs/Articles:

1. Understanding the Tax Efficiency of ETFs - American Century 

2. The Great Resignation Is Accelerating - Derek Thompson 

3. The creator economy is failing to spread the wealth - Sarah Fischer

4. “Resonance Theory” – Could Consciousness All Come Down to the Way Things Vibrate? - Tam Hunt

Books:

The Cold Start Problem: How to Start and Scale Network Effects - Andrew Chen

Need new reading material? Visit my Amazon page for my most purchased book recommendations.

Tweets of the Week: