San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Tuesday, December 29, 2015

Donald Trump Is Not As Rich As He Could Be

I received a Christmas greeting from an old friend this past week.  As he was catching me up on the news from his part of the country he told me about a radio show he was listening to recently.  This fellow likes financial matters and he listens to lots of financial talk radio.  He also is an active stock trader and routinely tries to predict the market.  We have gone back and forth over the years about our different philosophies of investment.  I hold to the tried and true "buy and hold" approach to stock market investing and he believes it is possible to beat the market with active management and market timing.  He told me a story that he had heard on talk radio that confirmed my bias when it comes to stock market investing.  I went in search of the story on the internet and was able to find it.
According to this website I found that confirmed my friend's tale, "Celebrity real estate mogul, media sensation and now-presidential candidate Donald Trump is probably best known for his enormous wealth and distinctly abrasive personality. In 1974, Trump inherited $40 million from his late father, self-made multimillionaire and developer Fred Trump, along with his father’s real estate empire. In 1982, Forbes estimated Trump’s net worth to be $200 million. Today – although his actual net worth remains a mystery – Trump’s wealth is estimated to be somewhere between $2.9 billion (according to Bloomberg) and $4.1 billion (according to Forbes). Other financial institutions – including two separate banks that assessed Trumps assets and liabilities for business loans and the Federal Election Commission’s financial disclosure report – suggest much smaller holdings.
Despite all of the buzz about Trump’s business acumen and wealth – particularly recently during his run for office -- it is more than likely that he would have been a much wealthier man had he simply put that inherited sum into a mutual fund of S&P 500 stocks instead, then basically gone on a 40-year vacation. If Trump put the $40 million he inherited from his father in 1974 into index fund-equivalents (the first index mutual fund didn’t exist until 1976), instead of building skyscrapers and taking a chance on casinos, his wealth would have amounted to $3 billion – and without all the drama. If he put his total estimated $200 million wealth in 1982 into a hypothetical S&P 500 index fund, then simply rested on his laurels for 33 years, Trump’s fortune would have amassed to $8 billion today."
On December 9th I posted an article to this blog entitled, "Would you make this investment?," in which I told the tale of a stock mutual fund I own that has returned 13.5%/year since 1975.  The S & P 500 has had a average annual total return of 12.2% since 1975.  If you could have purchased an S & P 500 index fund in 1975, which you could not have done, you would have realized right at 12%/year in total return, after expenses.  The author of the story quoted above describes what would have happened to Donald Trump's inherited wealth if he had simply taken the $40 million he inherited in 1974 and invested it all into an S & P 500 index fund.  I am not sure where he got his figures but my calculations show that $40 million invested on January 1, 1975 would be worth $4.1 billion today.  Coincidentally, that is precisely how much Forbes estimates Trump's current net worth to be.  Even more important, from my perspective, is that if Trump had sold all of his holdings in 1982 and invested that sum into an S & P 500 index fund and simply held that fund until today, he would be worth double what he is worth today, with an astounding $8 billion in net worth.
Donald Trump is a blowhard who loves to brag about what a brilliant businessman he is.  He brags about how his multi-billionaire status is indicative of his expert ability to manage a business.  He informs those from whom he is soliciting a vote for next King of the Socialist Democracy of Amerika that he is qualified to lead this envy-filled land because of his track record in business.  Whether Donald is suited to be the next King of the SDA or not I do not know. What I do know is that my mother could have made more money than he has by simply putting the same amount into an index fund back in 1975 or 1982 and letting it sit there until today.  By the way, my mother, now deceased, did not know a single thing about investing. 
I am writing this post today for two reasons.  First, Donald Trump claims more financial ability than he has.  This observation does not make him unique.  Most people who actively manage their investment accounts and seek to time the market and predict the future grossly overestimate their ability to do so.  The world is filled with investment gurus who disparage the buy and hold approach and who will charge you hundreds of dollars to teach you their particular stock market timing scam.  People fall for those scams all the time because people believe it is possible, with the correct training, to predict the future.  Those of us who know we are not omniscient, a very small number of people by the way, also know that the best approach to long term investing is to be fully invested in quality stock mutual funds and make no attempt to manage them over time.
That brings me to my second reason for writing this post.  If you really and truly want to accumulate a nice nest egg for the future you need to run from the gurus who tell you they can predict the future and make a commitment today to invest for the long term with some quality stock mutual funds.  I will leave the investment selection up to you but you must buy only stock funds and you must hold them forever.  Donald Trump is not as rich as he could be, in fact he is only half as rich as he could be, because his ego got in the way when it came to investing.  Don't let that happen to you.  Don't be a Trump.

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