This article also appears in Forbes.
A large body of finance literature evaluates mutual and hedge fund managers relative to their peers. Certain investors, like Warren Buffet, stand out as having produced abnormal returns over a long period of time, and hence they are judged ‘winners’, or to have ‘superior skill.’ Those who don’t measure up are politely called ‘underperformers.’ In this short essay, I will try to evaluate the investment return of Mr. Trump given the same standards that apply in our literature. I will do so in an academic manner, relying only on substantiated facts. The calculation only requires a few pieces of information: 1) starting and ending wealth, 2) the investment asset class, and 3) the benchmark returns for that asset class.
- Starting and ending net wealth: For accuracy, we want the earliest date with a verifiable number. His father was a wealthy real estate investor, and Mr. Trump both began in and inherited his father’s business. A November 1, 1976 New York Times article quotes Donald Trump that his net worth is “more than $200 Million.” For consistency, I will first use this self-reported round-number figure and compare it to Trump’s self-reported round-number figure of his current net worth, which he claims is in excess of $10 Billion. I will then look at independent estimates.
- Asset Class: Commercial real estate is the Trump family business and has always been how he personally attests to making his fortune. For this reason, I use the “FTSE NAREIT All Equity REITs Index,” as the FTSE indices are carefully constructed, readily available, and reach back into the 1970s. This index tracks the performance of real estate investment trusts (REITs) that invest in various types of commercial real estate (offices, hotels, apartments). The index is broad and diversified, and importantly, is and has been open to investment by any ordinary investor. Hence, evaluating an investor against the index gives credit for picking certain types of real estate relative to the benchmark and will thus evaluate his ‘active skill’ relative to the market index of publicly traded real estate.
- Returns: The index has averaged 14.4% arithmetic (13.0% geometric) per year from December 1976 to December 2015. Note that this is slightly higher than the 12.3% that one might have earned in stocks using the Center for Research in Security Prices value-weighted index. Using the year-end value of the REIT index, an investment of $1 in December 1976 would have yielded $116 by December 2015.
Calculation: An investment of $200 million in 1976 in the FTSE NAREIT All Equity REITs Index would have compounded to $23.2 billion by year-end 2015. This is considerably above Mr. Trump’s recent self-reported net worth of approximately $10 billion. Mr. Trump has underperformed the real estate market by approximately $13.2 billion, or 57%.
Other considerations: Although the use of self-reported wealth at both the start and end of the period is consistent, these values may differ from independent estimates. A Business Week evaluation reports Mr. Trump was worth $100 million in 1978. If one compounds this estimate from December 1978 to December 2015 using the index’s return, then his fortune would be worth $8.6 billion. Forbes, meanwhile, independently estimates his current net worth to be $4.5 billion. In other words, independent sources point to an underperformance of 48%. These numbers, however, do not take into account leverage. The REIT equity funds have current leverage ratios around 36%, while Trump is documented to have been levered to 69%.* If one were to lever the REIT returns at Trump’s rate, then the index’s performance would be considerably higher. Not only is the $13.2 billion a potential understatement of Trump’s underperformance, then, but also it seems he needed to take on a market-exceeding amount of risk in order to achieve his underperformance.
Conclusion: In the finance literature, investors who have outperformed are said to have ‘skill’ or ‘talent,’ and those who do not are politely called ‘underperformers’. 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.’
*In 1988 as documented by: Mariotti, Steve, Debra DeSalvo, and Tony Towle. The young entrepreneur's guide to starting and running a business. New York: Times Business, 2000. Mr. Trump’s various bankruptcies are additional evidence of high leverage.