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TANSTAAFL: Trump vs. Index Fund Edition

If passive investing is the key to wealth, why isn't everybody as rich as Trump?
trump tower

Would Donald Trump be just as wealthy – or even wealthier – if he had simply put his money in an index fund?

“It takes brains to make millions,” according to the slogan of Donald Trump’s board game. “It takes Trump to make billions.” It appears that’s truer than Trump himself might like to admit. A new analysis suggests that Trump would’ve been a billionaire even if he’d never had a career in real estate, and had instead thrown his father’s inheritance into a index fund that tracked the market. His wealth, in other words, isn’t because of his brains. It’s because he’s a Trump.

In an outstanding piece for National Journal, reporter S.V. Dáte notes that in 1974, the real estate empire of Trump’s father, Fred, was worth about $200 million. Trump is one of five siblings, making his stake at that time worth about $40 million. If someone were to invest $40 million in a S&P 500 index in August 1974, reinvest all dividends, not cash out and have to pay capital gains, and pay nothing in investment fees, he’d wind up with about $3.4 billion come August 2015, according to Don’t Quit Your Day Job’s handy S&P calculator. If one factors in dividend taxes and a fee of 0.15 percent — which is triple Vanguard’s actual fee for an exchange-traded S&P 500 fund — the total only falls to $2.3 billion.

It’s hard to nail down Trump’s precise net worth, but Bloomberg currently puts it at $2.9 billion, while Forbes puts it at $4 billion. So he’s worth about as much as he would’ve been if he had taken $40 million from his dad and thrown it into an index fund.

Not quite. First of all, with multiple children, multiple wives, multiple homes, etc., Trump has got some pretty hefty expenses, which have to be paid for somehow. This is one of the many ways in which Trump is different from, say, Warren Buffet.

But there are more important reasons why the comparison is problematic, which I thank Matt Levine for delineating so I don’t have to.

First of all: the value of the S&P includes intangibles, but most assessments of Trump’s worth do not credit much if any value to his much-ballyhooed brand:

Bloomberg’s computation of Trump’s net worth basically takes the value of his buildings and golf courses; it “doesn’t value Trump’s brand beyond accounting for cash held in accounts for his licensing deals and business partnerships.” But of course the value of the S&P 500 doesn’t come from the value of its cash and buildings. It comes from expectations of future earnings. Trump claims that he’s worth more than $10 billion because of the value of his brand, which “goes up and down with markets and with attitudes and with feelings, even my own feelings.” That sounds silly when Trump says it about himself, but it is dead right about the S&P, which has had a whole lot of feelings recently. But ultimately its value comes from its claim on earnings, and the S&P price/earnings ratio is about 19.6. Just for laughs, put that multiple on Trump’s $300-million-ish of income and you get an organization worth about $6 billion.

Second, most of these comparisons assume that the alternative to being Donald Trump is investing 100% of your assets in a stock market index on a single date. But market timing is a thing – a really hard thing, harder (in fact) than making money in real estate.

[S]aying that you should buy and hold index funds is very different from saying that you should build your wealth via private real estate entrepreneurship and then, at the start of a bull market, cash out and put all of your money in an index fund. Market timing is a skill. Comparing actual Donald Trump versus perfect-market-timer Donald Trump sets him up to lose, but it sets everyone up to lose. Trump’s 1999 net worth was $1.6 billion. If he had cashed out in December and put that money in the S&P, he’d be worth about $2.7 billion now, again without eating. He’s worth more. So you can roughly say that Trump outperformed the S&P from 1974 through 1987, underperformed from 1988 through 1999, and slightly outperformed since.

Not to mention that any sensible portfolio allocation would include bonds and real assets along with stocks. But the most significant problem with the comparison is philosophical:

Not literally everyone can index! . . . [T]hose funds necessarily free-ride off of the capital allocation decisions made by investors, and ultimately off of the business decisions made by entrepreneurs. Dopes like me can grow our wealth by investing indiscriminately in all the companies in the index, but we can only do that because other people — many of them with Wharton degrees and inherited wealth — made the positive, risky decisions to build those companies.

I carry no water for Trump in any capacity, not as a businessperson and certainly not as a political candidate. But I’m as baffled by the conviction of political journalists that they could do investing better than the professionals as I am by the conviction of so many businesspeople and Wall Street types – Trump, for example – that compared to what they do, politics must be beanbag.

Meanwhile, if you want to annoy Trump, ask him why he’s underperformed Richard Branson – or Richard Lefrak – over the course of his career.

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