This article is in no way an endorsement or a rejection of Donald Trump, nor is it politically motivated. It is simply meant to show that a now-popular criticism is a prime example of failed logic. We are all capable of letting our personal biases influence our decisions. This pervasive failed logic can be catastrophic to our investment returns.
Donald Trump vs The S&P 500
Love him or hate him, the presidential run of Mr. Donald J. Trump has captivated America. None have been more mesmerized than the mainstream media outlets, giving him more coverage than any other candidate in recent memory – possibly ever. With this laser-focused attention has come a staggering amount of analyses and editorials. One of the most popular hit-pieces I’ve seen circulated around the world finance attempts to undermine Mr. Trump’s business acumen by comparing the growth of the assumed “net worth” of his business empire versus simply liquidating his assets decades ago, passively investing the cash into the S&P 500 and fading away into the sunset. The hypothetical analysis is as follows:
- Back in 1982, Donald Trump was listed on the Forbes 400 when the magazine published its first annual list of America’s wealthiest people. Forbes estimated Trump’s net worth at over $200 million. Forbes acknowledged Trump’s claim of a $500 million net worth. The article gives Trump the benefit of the doubt and sticks a price tag of $500M on his empire.
- The most recent Forbes 400 list estimates his current empire at $4.1 billion. However, in July, Trump issued a press release valuing his net worth at $10 billion. The article again gives him the benefit of the doubt and places a net worth of $10 billion on his empire today.
Now we get into the math. The article assumes an alternate reality where Trump liquidates his entire net worth of $500M into cash in 1982 and invests it all passively in the S&P 500 until today.
The author presents that from 1982 to 2014, the S&P 500 index had an annualized return, including reinvested dividends, of 11.86%. Had Mr. Trump simply invested his entire fortune into the index, today he would now be worth $20 billion, about double what he claims he is worth today. The article then goes on to add fuel to the fire by pointing out Trump’s four corporate bankruptcies (Out of how many total endeavors? Hundreds? Thousands, maybe?) and compare him to Warren Buffett, whose collective fortune is valued several times higher than Trump’s and fills Forbes’ No. 2 spot.
I read the analysis months ago and rolled my eyes at it, paying it little mind then. But now, I have seen this very line of thinking posted in many capacities throughout the web. Because the error in logic is so pervasive, I feel it necessary to pose a rebuttal.
Donald Trump’s Empire Is Not A Passive Fund
1. Calculating a compounded annual growth rate from fixed starting and ending points ignores the fact that Donald Trump has been making gigantic cash flow withdrawals from his empire over the entire duration.
- One current wife
- Two ex-wives
- Five children
- Seven grandchildren
- Four siblings
Donald Trump has been making cash flow withdrawals from his estate so staggering that he, along with all of the people above, have lived lifestyles far in excess to most historical kings, allowing them virtually anything money can buy and shuttling them around the world on private jets.
Alongside the ‘Royal Treatment’ his vast tribe of loved ones have received thanks to his constant and regular cash flow withdrawals, he also has funded a collection of some of the most lavish private estates the world over.
- Trump’s personal penthouse, located at 725 Fifth Ave., is one of the most valuable in New York City with an estimated price tag of $100 million.
- Approximately 40 additional NYC apartments at Trump Parc and Trump Park Ave, individually fetching as much as $100,000/month in rent, with individual penthouses sold for as high as $21 million.
- Mar-a-Lago country club, a 17-acre property that was formerly used as a private mansion with an estimated price tag in excess of $250 million.
- Seven Springs, a 60-room private “summer retreat” with 230 acres of land.
- The Kluge Estate, a 23,000 square foot mansion on 2,000 acres of land now known as Trump Vineyard Estates.
- His six-bedroom, five-bathroom Colonial-style mansion on Rodeo Drive in Beverly Hills.
The ‘Trump vs The S&P 500’ “analysis,” if you can call it that, completely ignores the massive cash flow withdrawals necessary to fund his lifestyle of mindblowing excess. This article assumes Trump doesn’t purchase a single sandwich over 32+ years.
2. Donald Trump’s empire is not a passive fund, and as such cannot be compared to one directly. It is an active, almost “living, breathing” entity.
An index fund is nothing more than a passive pool of capital. It is a sort of quasi-ownership. Investors are not going into work every morning and physically contributing to the operation of these companies, they are simply siphoning off the equity like a parasite. That’s what we investors really are – mostly-beneficial, symbiotic parasites on a larger host.
Trump’s empire was built by active doing. The only job investors are creating by dumping their money into a fund is the fund manager’s position. Throughout the construction of Trump’s empire, he has created and supplemented countless jobs – realtors, architects, excavators, brick layers, electricians, plumbers, glaziers, landscapers, custodians, doormen, hosts and hostesses, waiters and waitresses, accountants, engineers, jewelers, textile manufacturers, golf caddies, public utility workers, countless levels of diverse management – tens of thousands, hundreds of thousands, maybe even millions of jobs in the 2nd and 3rd order have been directly created or supplemented out of necessity to provide for his empire. Because the dollars he generates from his daily operations are from active establishments rather than passive funds, these dollars have tremendously more impact on society as a whole and the individual taxpayer. The benefits the Trump Empire has contributed to society are incalculable.
3. The article assumes an investor solely invests for monetary gain.
Donald Trump is a man with a lust for fame and power. If his public persona is not evidence enough of his narcissism and confidence, consider he attempts to lend his name to virtually everything he can get his hands on. When Donald Trump owns something, he wants the world to know, and he wants you to know it’s the greatest whatchamacallit that has ever existed.
Through his life, he has had the pleasure of knowing his endeavors have influenced the lives of millions of people. He has the pleasure of knowing he is the reason why so many families have had roofs over their heads and food on their table. He also has the pleasure of knowing if he so chose to, he could take it all away and crush them like bugs. That is power an investor in a passive mutual fund can never have. Your investment portfolio may have made you wealthy, but his has made him a demigod.
4. Comparisons to Buffett are senseless.
Trump likes to separate his investments as individual entities. As mentioned above, his failures become publicly visible because we can see the fall of a standalone company with his name plastered on the side. Considering the hundreds, if not thousands, of companies and ventures the man has likely embarked upon over the course of his life, four corporate bankruptcies are actually impressive. I grew up 30 minutes from Atlantic City, NJ – my family was in part sustained by these businesses and I would blame the policies of the city and state long before I blamed Trump for Atlantic City’s crumbling casino industry. If you’re blaming Trump for the failure of an Atlantic City casino, you’ve never been to Atlantic City. As a now-resident of the Philadelphia suburbs, I have seen firsthand the transfer of wealth from Atlantic City to the brand new network of local Pennsylvania casinos.
Buffett, on the other hand, keeps his name off his investments and manages them through a single holding company. As such, when his investments fail, they are absorbed underneath a larger umbrella, invisible to the general public. Has the public heard of Dexter Shoe Company? Energy Future Holdings? How about his poorly-timed 2008 investment in ConocoPhillips? That is a short list. Most of the public are blissfully unaware of these failures, and many more. We all make bad investments at times, and sometimes, it is not the fault of the investor.
5. The analysis completely ignores the effect of taxes.
Had Trump liquidated all his assets into a hypothetical cash pool to shove into an index fund, he would have had to pay taxes on much of the appreciated value of his assets. Investments are generally allowed to compound tax-free until they are sold. Liquidating all his assets would have resulted in a massive tax bill, dramatically shrinking the amount of capital available to invest in any fund.
What Can This Teach The Investor?
In order to be a successful investor, it is imperative to understand the key factors that influence shareholder return:
- Stock price appreciation
- Dividends paid
- One-time distributions
- Expense fees (for funds)
- Commissions (for trades)
- Tax consequences
All of these things affect the investor’s total return. The analysis presented that compares Donald Trump’s net worth today to a hypothetical initial passive buy-in into an S&P 500 fund from 1982 onward completely ignores the fact that his portfolio has been paying out absolutely staggering dividends to not just himself, but dozens of others for decades. This comparison is like calculating the total return of the S&P 500 without accounting for dividends – according to this analysis, 42% of the total return of the S&P 500 from 1930-2013 were via dividends. This line of thinking is a catastrophic failure of logic.
And it doesn’t stop there. It doesn’t account for the taxes he’s paid into society, the millions of lives he has helped support via direct job creation and 2nd-and-3rd order effects. Over the span of three and a half decades, Trump has extracted hundreds of millions, if not billions in cash from his portfolio for spending. When accounting for these huge cash outflows, it becomes clear that Trump has decimated the average return of the S&P 500, while simultaneously strengthening the bank accounts of millions by providing paychecks, and increasing the standard of living for millions through the effects of gentrification.
I have reached the conclusion that these types of faulty analyses occur due to three major factors:
- Ignorance: The author is simply lacking the knowledge to draw a complete analysis.
- Internal Bias: The author has deep emotional connections to the content. They have a natural inclination to seek confirmation bias, which clouds their judgment.
- Deceit: The author has an agenda.
I believe these are the three major pitfalls that investors will face throughout their careers. We can be better poised to triumph by addressing these concerns:
- Combat ignorance by sticking to a streamlined plan that you understand. Much of Trump’s success has been through real estate, while most of Buffett’s success has been through uncovering deeply undervalued companies and purchasing them at rock bottom prices. Chances are, neither of them would be as successful as they are today if they both wanted to be top-notch value investors and top-notch real estate tycoons. It is impossible to be good at everything.
- Be more like Charlie Munger and avoid confirmation bias. Always listen to the other side of the table. As an investor, your best friend is knowledge, and knowing the downside risk is as important as knowing the upside potential. Doing so can help you avoid holding onto the next Eastman Kodak.
- Never trust anyone. Never make an investment based on the advice of someone else. Always do your homework and personally vet the opportunity.
Keeping these three tenets in the back of your mind can help avoid such catastrophic errors in logic.All information found herein, including any ideas, opinions, views, predictions, commentaries, forecasts, suggestions or stock picks, expressed or implied, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. I am not a licensed investment adviser.