But you say, wait, wait, wait. Isn’t he a huge business success? Doesn’t he know what he’s talking about? No, he isn’t. And no he doesn’t. Look, his bankruptcies have crushed small businesses and the men and women who work for them. He inherited his business, he didn’t create it.Mitt Romney, talking about Donald Trump in his attack speech last Thursday
There has been a lot of controversy surrounding Donald Trump’s success as a real estate developer, investor, and businessman.
Last week, Mitt Romney (the 2012 Republican presidential nominee) called Trump a “phony” and a “fraud”. Romney started Bain Capital, a well-known private equity firm, and is worth about $250 million.
But Trump, on the other hand, is a multi-billionaire.
So is Romney right? Is Trump a phony? Or can Trump’s investment record speak for itself?
Let’s take a look.
The 3 Eras of Trump’s Career
According to The Economist, Trump’s career can be divided into three parts:
1. The era of debt-fuelled expansion (1975-90)
Mr Trump’s big break was the renovation of a site at Grand Central Station, which is now occupied by the Hyatt Hotel. He raised cash, found a tenant, secured permits and completed a complex building job, according to his biographer, Michael D’Antonio. Buoyed by success he went on a long spree, buying buildings in a depressed Manhattan (including the site of Trump Tower), expanding into casinos in Atlantic City and picking up a small airline. His investments over this period were worth perhaps $5 billion in today’s money, with four-fifths of that debt-financed.
2. The era of humiliation (the 1990’s)
This era came as his casino business faltered and two of his gambling entities defaulted (two other related casino enterprises defaulted in 2004 and 2009). This destabilised the whole of Mr Trump’s operation, which may have had as much as $6 billion of debt in today’s prices. Through asset sales, defaults and forbearance from his creditors, Mr Trump clung on and avoided personal bankruptcy. As property prices in Manhattan rose he recovered his poise, and by the early 2000s he was doing small deals again, for example buying the Hotel Delmonico on New York’s Upper East Side.
3. The era of celebrity (2004 and beyond)
The final stage, of celebrity, came with his starring role in the The Apprentice in 2004. The success of the TV show, which had 28 million viewers at its peak and ran until 2015, led Mr Trump to create a flurry of ventures to cash in on his enhanced fame. He is now involved with 487 companies, up from 136 in 2004. They span hotel licensing in Azerbaijan and energy drinks in Israel. At face value Mr Trump has turned his name into a global brand that prints cash.
The Uncertainty Surrounding How Much Donald Trump is Worth
Because Trump doesn’t run a public company and hasn’t released his tax returns, no one’s really sure what his actual net worth actually is.
Trump claims that he’s worth almost $10 billion.
Forbes, The Economist, and Bloomberg on the other hand estimated that number to be more like $3-5 billion.
Some more facts about Trump’s wealth:
- Of his wealth, only an estimated 7% is outside America and 66% is made in New York.
- Only about 22% of his worth is derived from assets that he actively created after 2004, when he became a reality TV star.
- Some 64% is from conventional property and a further 17% from resorts and golf clubs.
- His biggest recent deal has been in real estate: buying the Doral hotel in 2012 out of bankruptcy.
- Only 11 of the licensing and branding companies created since 2004 make more than $1m of income.
- Mr Trump says there are 38 more deals in the pipeline but it is hard to know their worth.
Trump’s Investing Performance
According to The Economist, Trump’s performance is tricky to gauge because early estimates of his wealth may have been overstated.
If we start at 1985, when Trump first appeared in the rankings without his father, he has greatly underperformed both the S&P 500 and the Manhattan commercial real estate index.
If we start in 1996, when he had just clawed his way back from the abyss (perhaps the most generous staring point), he has slightly overperformed.
And if we start a decade ago, Trump has slightly underperformed again.
According to Professor John Griffin, who teaches at the University of Texas at Austin:
“Using both independent and self-reported estimates of his net worth, Donald Trump has underperformed his real estate investor peers by 48% and 57%, despite taking more risk. Donald Trump is obviously a skillful presenter and a talented entertainer, but in terms of his investment skills, he is a clear underperformer.”
Trump’s ranking among American billionaires has fallen from a peak of 26 to 121. According to The Economist, “by the standards of the country’s oligarchy, he is small beer. His property empire is a seventh the size of America’s biggest real-estate firm.”
And even though Trump was sensible enough to get out of casinos in Atlantic City, he missed out on the industry boom in Macau that propelled rival Sheldon Adelson of Las Vegas Sands to a net worth of $26 billion.
We should also take into account outside investors in Trump’s projects – roughly $5 billion of equity and debt (at current prices) from outsiders sat in Trump vehicles that went bust.
What if Trump Had Invested in an Index Fund?
So is Trump a bad investor?
I don’t think it’s really fair to say so. Whether his net worth is $3 billion or $10 billion, the fact of the matter remains that Trump is still a multi-billionaire. And even though he inherited his company from his father – and drove several properties into bankruptcy, Trump was able to build (and rebuild) his empire to what it is today.
But is Trump as good as he says he is?
Citing data from Forbes, The Associated Press estimates that Trump’s net worth quadrupled from $1 billion to $4 billion between 1988 and today. That’s an impressive gain, but it’s nothing compared to the wealth produced by investors such as Warren Buffett and Bill Gates. Gates’s wealth increased from about $1 billion to $80 billion over the same period. Buffett had about $2.5 billion in 1988, and has $68 billion today.
Even you or I could have made more money than Trump did if we started where he started in 1978:
Citing an independent evaluation, Business Week put Trump’s net worth at $100 million in 1978. Had Trump gotten out of real estate entirely, put his money in an index fund based on the S&P 500 (if index funds existed back then) and reinvested the dividends, he’d be worth $6 billion today – twice as much as the $2.9 billion Bloomberg estimates his net worth to be. Other sources estimate that he’d be worth $13 billion today!
Of course, being good at investing and being a good businessman are not the same things. Warren Buffett has often said that he became a better investor because he was a good businessman, and he became a better businessman because he was a good investor.
Compared to other investors and other investment options – i.e. other real estate developers, competing casino companies, the S&P 500 index, and the Manhattan commercial real estate index – Trump has clearly underperformed over the long-run.
So it would appear that his success in building his net worth came from the head start given to him when he inherited his father’s company and his incredibly powerful personality.
In any case, what the United States needs now is not a good investor or a good businessman – it needs a good president.
Only time will tell if Trump – investment record and business success aside – will be able to fill that role.