Trump shoulda been an index investor?: James Saft

October 21, 2015

Oct 21 (Reuters) – Donald Trump’s possibly market-lagging
stewardship of the fortune he inherited illustrates in a bizarre
way the attractions of active wealth management.

Property mogul, celebrity and presidential candidate, Trump
by some accounts, not his own, appears to have failed to keep
pace with market gains since he inherited $40 million in 1974.

While there is no definitive accounting of his net worth,
the outputs from his decision to build up a development
organization are clearly more than financial. What he’s
definitely garnered instead: a role, fun, influence, and the
illusion of control.

Those are four very important components in the active
management offering, and help to explain why so many choose to
plow money into a business or actively managed mutual or hedge
fund even despite comprehensive data indicating, at least when
it comes to investing, that they would probably be financially
better off with cheap index products.

A look at Trump’s experience shows that fun often, wait for
it, trumps boredom, and having an identity or purpose in life is
a good with a value. That’s as true for the guy betting on
small-cap momentum stocks as it is for a rich man backing a
macro hedge fund.

Here’s the thorny part: what Trump is actually worth. There
have been numerous estimates, all of which are just that, given
the private nature of his companies and holdings. Trump has a
long track record of hotly disputing every one as being
substantially too low.

The National Review in September did an analysis of his
wealth versus the returns he might have earned in an S&P 500
index fund and found evidence Trump might have done better by
sitting back and relaxing. (here)

When his father, developer Fred Trump, died in 1974, the
Donald’s share was worth an estimated $40 million.

Put that into index funds and you get $3 billion today. Put
the $200 million in wealth Forbes estimated Trump had in 1982
into those same funds and you have $8 billion today.

Trump’s current wealth has been estimated at $4.1 billion by
Forbes and $2.9 billion by Bloomberg. Trump himself in July said
his wealth exceeds “TEN BILLION DOLLARS” (his capitalization).

Believe whom you like, but what is clear is that there is a
substantial possibility that Trump would have been financially
better off sipping cocktails at the beach as his money
compounded in index funds. You can also argue that the gains
from an index fund would have come with less volatility, given
the four corporate bankruptcies associated with Trump
organizations.

WHAT MAKES DONALD RUN?

While Trump surely maintains that his wealth has beaten the
market, a look at some of the other benefits he’s enjoyed as a
result of actively investing on his own behalf shows both the
psychology and, perhaps, reality of steering one’s own ship.

Firstly, Trump has made himself famous, building himself a
very public role in the process. No matter how much money you
put into an index fund they are not going to put your name up on
a building, nor is anyone likely to buy the book you write. For
someone as given to self-aggrandizement as Trump this is
important, but you don’t have to have an insatiable appetite for
publicity for this to give a payoff.

Rich people pay over the odds for trophy assets like sports
teams and even newspapers for very much the same reason. What is
the point of being rich if you don’t get to enjoy it? It is fun,
at least for Trump, to run for president, being an influential
big shot, and this is a benefit he’d not have had if he had
stayed home in Queens depositing dividends.

Most forms of agency investing, from active mutual funds up
to the most clubby alternative investments, also play on this
desire, working hard to make their investors feel like they are
smart, insiders – people whose wealth is easy to explain given
their discernment in choosing the Brazil Un-Hedged Leveraged
Long/Short Credit Fund.

Some of this falls under the rubric of the illusion of
control, our human tendency to overestimate the extent to which
we can predict and control what happens. Few things can be more
pleasurable, and self-reinforcing, than thinking that you, a
person above the common run, have skillfully built a business,
picked an asset class or hired a private equity manager.

To be sure, many people take capital and do fabulously by
building businesses or hiring agents to manage it actively. And
it would be silly to count as valueless the other benefits of
having a purpose, being a big shot or thinking you are in
control.

Whatever your ideas about the good life, there is more to
it, as Trump demonstrates, than simply maximizing returns.
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

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