Here you go....

Posted on: October 20, 2016 at 07:53:32 CT

The simplest version of the comparison seems to be that if Trump had taken his $40 million inheritance from his father in 1974, converted it into cash, and invested it in the S&P 500, reinvesting all dividends and spending no money along the way, he'd have about $2.3 billion or so today, depending on how you do the math. Bloomberg computes his actual net worth as $2.9 billion, so he's modestly outperformed the S&P over his career, again depending on how you do the math. That, however, understates his performance. For one thing, if he put all his money in index funds and reinvested all the dividends for 41 years, he'd be dead, because you can't buy food with reinvested dividends. As an investing strategy you can't beat compound returns, but as a strategy for life food has key diversification benefits. Also I feel like Trump has unusually high consumption expenses? For instance, to choose one item at random, I gather that he is currently funding his own campaign for president. That would also eat into his returns.

The public valuations of Trump's assets may also not be quite apples-to-apples with a market value of the S&P 500. 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.

So it seems like Trump has outperformed the S&P 500 over his career. But the main line of criticism is that he has underperformed the S&P over some other, shorter period. Matthews says, "If you compare Trump's performance since 1982, when the stock market started to take off after the early-'80s recession, it looks pretty abysmal." If Trump had taken his 1982 net worth of $200 million, cashed it out, and put it all in an index fund with reinvested dividends, he (would again be dead of not eating, but his heirs) would have $6.3 billion today. Similarly, the Associated Press math has Trump cashing out his $1 billion net worth in 1988 -- shortly after the 1987 stock market crash -- and putting it in index funds worth $13 billion today.

But of course saying 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. That middle period was rough. Abelson writes:

Before this year’s presidential race, the grandest triumph Trump had managed was staying on his feet during his 1990s disaster as the economy fell out from under him. He lost the Plaza, the yacht, and the airline, and the casinos filed for bankruptcy—but he himself didn’t, as he reminds his crowds on the campaign trail.
But his performance over the whole 41-year period was at least modestly better than the S&P. If you timed the market right, you'd have done better than him. Congratulations to you on being so good at timing the market.

There are other ways to compare that would make Trump look better or worse. On the one hand, it would be pretty weird for a rich person to keep all his money in large-cap U.S. stocks over the course of 41 years. Even if you're planning to invest all your money in low-cost index funds, and not spend any of it on food, most people will probably tell you to diversify. Maybe buy some bonds? Especially as you get nearer to retirement age, or presidential age, as the case may be? Comparing rich individuals with the S&P is a little like comparing hedge funds with the S&P. The S&P is not the right benchmark for all investment returns everywhere. On the other hand, it is sensible to compare your risk-adjusted returns with the risk-adjusted returns on the S&P. We can't really do that without a good time series of Trump wealth, but given that 1990s drawdown you might draw some negative conclusions about his Sharpe ratio.

The weirdest part of the Trump-index comparison is not the math, though, but rather the idea that putting all his money in index funds was the Right Move, while investing it in buildings and golf courses and liquids was the Wrong Move, and that you can tell by looking at cumulative returns. That is not how investing works! Not literally everyone can index! Some people need to build and manage and run businesses, and some other people need to allocate capital to those businesses. Of course, most people should be doctors and lawyers and teachers and bloggers and whatever. There's a really good case that those people -- the large majority of people whose skills and training and full-time jobs are in something other than capital allocation -- should put their money in diversified low-cost investments like index funds. But those 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. If everyone indexed, nothing would get built. Investing in index funds might produce better returns, but it can't build a building, or stiffen it, or brand it with golden letters. And that's worth something too.