Recently, there’ve been a flurry of claims going around on blogs and social media to the effect that Donald Trump would have been better off putting his dad’s money in an index fund, rather than embarking on the business career that involved numerous bankruptcies but ultimately left Trump quite rich. Then there’s been the pushback from people like Matt Levine, arguing that Trump has, in fact, managed to beat the market.
The pro-Trump side of this argument seems to be on its way to becoming the conventional wisdom for a lot of smart people who otherwise have no love for Trump. However, if you look at what the more nuanced anti-Trump folks are saying, they’ve got a pretty good case. It’s important to distinguish two claims:
- Trump should have put his money in an index fund.
- Trump’s wealth is primarily due to his father; his own efforts at best played a secondary role in his wealth.
I think (1) might be true, though it’s very hard to tell, as we’ll see over the course of this post. Claim (2), however, is clearly true, and there are some important lessons to be learned about wealth and investing from understanding why it’s true.
One thing that makes (1) difficult to assess is that Trump’s company, The Trump Organization (which was founded by his father Fed Trump) has never been a publicly traded company. With someone like Mark Zuckerberg, you can find out how many Facebook shares he has from SEC filings and find out Facebook’s share price from your favorite provider of financial data. Multiply those two numbers, and you know exactly how much Zuckerberg’s Facebook stake is worth.
We can’t do this for Trump. We can’t do it for the current value of the company, and we can’t do it for its value at the time The Donald took over running it in the early 1970s. One biography of Trump estimates that his father’s real estate holdings were worth roughly $200 million around the time Trump took over, but this is just a rough estimate.
And there’s no exact year attached to that number. Levine seems to favor a calculation that assumes Trump received $40 million from his father in 1974 (which sounds reasonable, as Trump has four siblings). But I don’t see any particular justification for assuming 1974 as the exact start date; if you play around with this calculator the results are highly sensitive to small differences in starting assumptions.
Actually, the calculation will be unrealistic no matter the exact year and dollar amount you plug in, because Trump didn’t technically inherit any money from his father in the 1970s–Fred Trump didn’t die until 1999. Granted, when Fred decided he wanted to retire, he could have gradually sold off his real estate holdings and put the money in a stock portfolio that would eventually be inherited by his children, rather than have his son take over the business.
But the actual mechanisms by which Fred Trump helped his son get rich are rather murky. The best source I’ve been able to find is an article on CNN.com published after a gaffe in which Trump claimed “it has not been easy for me” because he had to start off his business career with nothing but a “small” million-dollar loan from his father. But that loan may have been the least of the help Trump got. Perhaps most notably:
When Donald made his first big deal, to replace the decrepit Commodore Hotel at Grand Central Terminal with a sparkling Hyatt, he depended on his father’s good name and his credit with lenders, which was worth tens of millions of dollars, according to Wayne Barrett’s 1992 book, “Trump, The Deals and the Downfall.”
It was Fred Trump, not Donald, who possessed the political capital — earned through donations to various candidates — that impressed trustees who sold Donald development rights at the hotel site. And it was Fred who reassured city officials that, “I’m going to watch the construction and provide the financial credibility.”
According to Barrett’s book, Donald could not get the money on his own, so Fred guaranteed half the $70 million cost of the project and Hyatt guaranteed the other. Fred was so instrumental in overseeing the project that he attended contract signings and, as was his custom, handed out souvenir silver dollars to those present.
It also seems likely that Fred’s political connections were necessary for getting his son the massive tax breaks from the city that helped him so much in his early career. And it’s entirely possible that Fred helped his son in other ways that have never been publicly disclosed. Again, it’s not like there are SEC filings for any of this.
Donald Trump might argue that because he paid off the loans he got from his father (and with his father’s assistance) in full, his father’s help wasn’t that big of a deal. But this is clearly wrong. If Fred had wanted to help Donald with the Commodore deal by just giving him money for the down payment, rather than guaranteeing the loan, how big would have the gift had to be? Maybe less than $35 million, but still many millions of dollars, surely.
Or another way: imagine if that “small” million-dollar loan has been designed as a tradable security. What would its market value have been had Fred Trump tried to sell it? If no one else would have lent Donald the same amount of money on the same terms, that implies the market value of the loan was less than its face value, and it represented a de facto gift likely worth hundreds of thousands of dollars.
(This is also, incidentally, why if the government bails out a corporation by giving it a loan, this is likely to be a massive hidden transfer from the taxpayers to the corporation’s shareholders, even if the loan is paid back in full.)
Knowing the present value of Trump’s assets is scarcely any easier than assigning a dollar value to the help he received from his dad. As explained in S.V. Dáte’s piece on Trump’s investing acumen, many suspect that Trump has long exaggerated his net worth. Some have alleged his current assets aren’t even worth a full billion dollars! (On the other hand, others have argued he makes so much money from licensing his personal brand that the brand alone should be valued at billions of dollars.)
The other thing that makes claim (1) difficult to evaluate is that investing necessarily involves a bit of luck. I’ve heard claims that the index fund vs. Trump comparisons rely on assuming Trump could have perfectly timed the market. But if you look at what many of Trump’s critics have actually said, they’re looking at a few different numbers to give a sense of the range of outcomes Trump could have faced, had he indexed.
As Dylan Matthews explains:
These calculations vary a lot depending on the size of fee you introduce, how much of the investments you take off for living expenses, which exact day of the year you buy the index funds in, etc. If Trump had invested $40 million in an index fund in January 1974, for example, he’d have $500 million less, after fees and dividend taxes, than he would have if he’d invested in August.
But the exact numbers aren’t the point. The point is that after decades of touting his business acumen, his ability to negotiate tough deals and spot good investments, and after spending this entire campaign season arguing that he’s qualified for the presidency based on his skills in the market, Trump nonetheless has an investment record that at best roughly matches and at worst underperforms the market. He did only as well or possibly worse than a retiree with a Vanguard 401(k) did.
Because there’s so much uncertainty around the history of Trump’s finances, it’s hard to pick objectively correct numbers to plug into the index-fund hypothetical. Even if we knew the objectively correct numbers to use, looking at a range of scenarios probably makes sense anyway, because investing always involves an element of luck. Considering the role of luck is unavoidable when trying to assess investing competence.
Now, I’m not someone who thinks no one ever beats the market except by luck. When you look at someone like Warren Buffett who’s massively outperformed the market, that’s strong evidence of skill. But the defenses of Trump I’m reading have him only modestly outperforming the S&P. It’s hard to tell that apart from luck.
Even if Trump is somewhat skilled, it’s unlikely in the extreme that he’d be as rich as he is today if not for his dad. Naively, you might think that if a person inherits $40 million, and gradually increases their net worth to, say, $2 billion, then they made $1.96 billion by their own effort. But this isn’t really true, because the nature of capitalism is that having money makes it easier to make money.
If at the start of the year, your assets consist of a few hundred bucks in your checking account, your chances of having a billion dollars at the end of the year (without inheriting it or marrying it) are basically zero. If you have $1 billion, going to $2 billion is difficult but possible if you own a company that does really well. But if you’ve got, say, $50 billion, you can probably get to fifty-one with minimal risk or effort (though you’ll only barely be keeping pace with inflation).
The lesson here is that when evaluating investors, percentage returns is generally a better measure than absolute number of dollars made. You can’t ignore the absolute number of dollars involved entirely, because the most profitable investment opportunities often don’t scale: if you’ve been successful as an angel investor, you can’t necessarily assume that if you had had twice as much money, you’d have been able to identify twice as many high-potential startups. But if you must boil everything down to one number, use percentage returns.
Applied to Trump, what this means is that getting $40 million from your dad and turning it into $2 billion (or whatever the exact numbers are) might require some skill. But it isn’t nearly as impressive as if he had gotten $0 from his dad and turned it into $1.96 billion. Not by a long shot.
This is also an important principle to keep in mind when evaluating other celebrity business leaders. For example, I have no doubt that PayPal’s gang of cofounders–Peter Thiel, Elon Musk, et al.–are a group of smart, hardworking people. But I don’t know that the fact that Musk has many billions more than any of the others tells you much about Musk. In percentage terms, he has something like four times what Thiel has, accumulated over many years, which could be due to luck. Especially in the high-risk worlds of entrepreneurship, venture capital, and hedge funds.
The other lesson we can learn from Trump is that directly handing your kids cash isn’t the only way to help them become wealthy. You can lend them money to start a business–possibly at below-market rates, or in quantities they’d never be able to borrow from a bank at any rate. You can hire them to run the family business and compensate them generously for doing so. You can guarantee their loans. You can ask your friends to do favors for them. And so on.
Oh, and remember what I said about Trump’s personal brand arguably being worth billions? If so, then a large part of what Trump did is travel a path of “have wealthy father” –> “become celebrity” –> “use celebrity to make even more money”.
And he doesn’t seem to be the only celebrity to have done this. Paris Hilton, for example, has recently taken to bragging about earning most of her money herself, having received “only” a few million from her family. But her earnings depend heavily on cashing in on her celebrity, which she never could have achieved without her family name.
This suggests another way for wealthy parents to help their kids become wealthy too: let them use their relationship to you to become celebrities and then turn that celebrity into $$$.
Some people will probably interpret this post as an anti-capitalist rant, but many of the core points here–like the fact that having money makes it easier to make money–are uncontroversial facts about capitalism that anyone who’s saving for retirement or thinking of starting a small business should understand. Whether it’s practical to create a better system is a topic for another day.