Bill Barker examines an intriguing election story and draws a relevant lesson for individual investors.
(Note: The author's views are his own. Motley Fool Asset Management is not a political organization and does not have an official opinion on the 2016 election.)
We'll soon be mercifully finished with the 2016 presidential election cycle. I think it's fairly safe to say that there have been a number of intriguing stories during this year's campaign. Without getting too political, I'd like to examine a story that I find fascinating and that I think has some lessons for individual investors: the assessment of the business acumen of GOP nominee Donald Trump.
On one hand, it's easy for those of us who work in equities to recoil at the idea of Trump as a successful businessman. His record in the equities world is, after all, quite poor. He's only been associated with one company in the public arena (his own), and he managed to lead it into bankruptcy twice. He lost a staggering amount -- more than $1.5 billion for investors -- in the process. Trump Hotels & Casinos came in dead last in a 1999 list of the country’s most admired companies as voted on by10,000 executives and analysts, according to Fortune magazine. And that was five years before it first went bankrupt. It's safe to say that stock market investors have never considered Trump a success.
On the other hand, it's clear that despite those bankruptcies, Trump nevertheless is a very wealthy man whose grown his wealth a great deal. Forbes magazine has been tracking the wealth of the richest people in the world, and Trump is comfortably on the list. An argument has surfaced that if Trump had merely taken the money he had in the early 1980s and invested it in the stock market, he would be a wealthier man today than he has become through his own efforts. That may also be true, but looking at some of the math reveals our important lesson: the United States economy has been a fantastic place to be invested over the last 34 years.
In 1982, Forbes initiated its annual inspection of the wealthiest in America, which it dubbed the Forbes 400. Donald Trump made the first list, and every year since, Forbes has taken a shot at estimating the wealth of the richest in our society. For several years in the early 1990s, Trump fell off the list, and there was no published calculation of his wealth, but for the most part, he’s been a fixture. I ran a yearly calculation of how money invested directly in the S&P 500 would have compounded, staring with $100 million in 1982, the first year measured. I used the figures for the end of June in each year, as that seemed fair against an annual September publication of the wealth of the individuals on the list.
(Note: the calculations below are based solely on the Forbes list's estimates of Trump's net worth, which may or may not be accurate. We do not make representations as to the accuracy of these calculations on his hypothetical returns.)
Here's the chart:
(The Y axis represents $ Billions)
The divergence in the early years is a result of Trump’s taking on debt during a rising time for real estate and the effect of leverage when things are going right. The early to mid-’90s is a look at what happens when things go against you and you have too much debt. (The lack of any figures for Trump in those years doesn’t indicate he had no money, just that he didn’t have enough to make the bottom of the list of 400.)
There are other divergences that pop out at you as well – the bear market for equities from 2000 to 2003 put the S&P 500 significantly behind for a while, and again in 2008-2009, though values in real estate declined significantly as well over the same time period.
While the Trump bar in the graph was a little bit ahead as of June 2015 and a little behind as of June 2016, that isn’t of necessarily great import. The annual compounding over the 34-year span looks uncannily similar.
- S&P 500 annualized returns: 11.8%
- DJT annualized returns: 11.2%
If we had stopped the clock last year, it would read:
- S&P 500 annualized returns: 12.1%
- DJT annualized returns: 12.2%
Given the fluency of stock market returns over short periods of time, and the uncertainty of calculating the value of private holdings, we can call that a tie.
I’m not here to weigh in on which is really better. Trump, aside from taking issue with the Forbes methodology for calculating his wealth, could point out that he has spent a lot of money over those 34 years. I’m just pointing out that there’s a great deal of similarity in the pile of money you had at the end of 34 years assuming you had $100 million to start with and the intelligence to invest in America, and the pile of money Donald Trump has amassed through other means.
But let’s look at these numbers in slightly different ways. First, we’ll split them into two 17-year periods – remembering that Warren Buffett has also commented on the interesting things that appear over 17 year periods.
- S&P 500 annualized returns: 19.42%
- DJT annualized returns: 17.7%
- S&P 500 annualized returns: 4.64%
- DJT annualized returns: 5.05%
Those numbers seem, at first glance, to be stunningly different – 17-year periods where growth slowed down from the high teens annualized to mid-single digits annualized. You might conclude, just considering the raw numbers, that there was, dare I say, a greatness in America missing in that last 17-year period.
But let’s strip out inflation to start, as that’s a mirage that makes for big numbers, but no actual creation of value.
1982-1999 (inflation adjusted)
- S&P 500 annualized returns: 12.16%
1999-2016 (inflation adjusted)
- S&P 500 annualized returns: 2.37%
Inflation is only a bit of the problem. Stripping out the illusion created by inflation still leaves a massive change in annualized wealth creation over these two periods. Of course, a June 1999 ending point for the first measurement period and the start of the second creates enormous measurement problems. June 1999 was near enough to the peak of the dot-com bubble. Abnormal starting or ending points are going to make tough comparisons. Visually, you can see that it took until 2011 for the market to get and stay (at least to date) above that 1999 number. Factoring in inflation, there was no wealth created in the market between 1999 and 2013.
In fact, because of this, what at first glance seems like it should be a major component to Trump’s wealth isn’t. Donald Trump’s father, Fred Trump, coincidentally died in June 1999, with an estimated estate of some $250 million to $300 million. After taxes and dividing it among various family members, Donald would have inherited, at least, tens of millions, but regardless of what that number is, and how it was invested, it has probably only roughly doubled in value since that time. A nice chunk of money, to be sure, but not much of a needle-mover on the pile of money that had been growing over the previous 17 years.
It's worth touching on the measured loss in wealth Forbes sees between 2015 and 2016 for the Donald. This is not the product of any missteps by Trump over that time period, but a decline that Forbes sees in the value of his Manhattan real estate. Whether you’re a fan of the Republican nominee or not, it should be noted that declines in Trump’s fortunes have correlated with tough times for the economy as a whole. They have occurred in 1989-1990, 2008-2009, and now this year. Whether past is prologue is anybody’s guess, but it’s a data point that is worth keeping an eye on.
Mostly, what we can take away from the charts is that wealth invested in the American economy compounds over time, but that 1982 was a phenomenal time to be able to put money to work in our nation’s economy. You could hardly have helped being massively wealthy today if you’d had $100 million to put to work then.
There might be no particular reason to be impressed with an individual who turned $100 million into $3 to $4 billion if he or she had been fully invested over the past 34 years, but it’s a phenomenal benefit the American economy has made possible. Anybody could have participated in that type of growth in his or her savings over the same period, though, for almost all, from not nearly as lofty a starting spot.