Did Donald Trump Beat the S&P 500 With His Career Net Worth Increases?

Did Donald Trump beat the S&P 500 with his net worth increases over his career… or should he have invested in index funds?  I’ll give a short answer, then back it up with a longer article: Trump’s net worth increases probably beat investing in the S&P 500, depending on where you start the counter. (1974 – yes, 1982 – maybe, 1988 – no… but why 1982 and 1988?).

However, it’s really a silly question, for reasons I’ll get to in this piece.  Here’s the real question:

Should Donald Trump have invested in the S&P 500 back in 1974?

No.

(See the comments where I run the math again through March 2016, and note LOO’s theory that 1982 is when Forbes wealth estimates would have started, perhaps explaining a 1982 start date).

Donald Trump Beat the S&P 500 for Many Timeframes- Our Estimates

(I’m not sure why 1982 and 1988 are included in other articles as dates when Trump ‘should’ have switched to stocks, but I have included them as well for completeness.  The 1982 numbers credit Trump with a personal net worth of $200 million, $160 million more than his share of the family business in 1974 would suggest.  Further, the 1988 numbers from Forbes credit him as a billionaire with a cool, even billion.  $40,000,000 in January 1974 into the S&P 500 would have left Trump at a ‘mere’ fraction of that, as a $130 millionaire in December 1988.

Also – would you walk away after outperforming stocks like that to that point?)

Why Are Variations of This Question So Popular?

Well, Mr. Trump is leading in the Republican Primary polls for the 2016 Presidential Election while we’re researching this piece.  Mr. Trump is an entertainer and businessman who has a reputation based upon his success as a real estate developer.  The S&P 500 is a convenient benchmark to use when comparing mostly passive investment returns – risky and volatile but usually positive – to other methods of generating wealth.

S.V. Date, writing in the National Journal, reported back in the beginning of September that Donald Trump’s father’s firm was worth around $200 million in August 1974.  Fred Trump had turned the reins of the firm over to young Donald, one of his five children, back in 1971.  Doing some quick math, Date estimated that The Donald would be worth roughly $3,000,000,000 (that’s $3 billion, with a ‘b’) if he had simply invested his 1/5 share of the firm into the S&P 500, then sat back and reinvested dividends.  Before that, (curiously removed from many sites), an Associated Press report estimated he’d have been worth north of $11 billion if he had taken his funds in 1988 and switched from Real Estate to S&P 500 investing. (No word on why 1988 was chosen.)

After Date’s article, a number of other writers tackled the question, and actually credited Don’t Quit Your Day Job‘s humble S&P 500 calculators – both our total return calculator and our periodic reinvestment calculator – for crunching the numbers.  Notably, Dylan Matthews at Vox penned an excellent piece and correctly noted that Date’s $3 billion estimate was about 3/4 of a billion dollars too high due to management fees and taxes.  Matthews estimated a terminal value of $2.3 billion for Trump’s share of the family fortune

What Did You Find When You Looked Into Trump vs. the S&P 500?

First – estimates of Mr. Trump’s net worth vary.  You can read the full controversial history on Wikipedia, but Trump claims a $10 billion net worth while Forbes’ oft-cited Richest Billionaires List puts him (as of 10/1/2015) at $4.5 billion.  Either number, of course, is well above the 1974 numbers – so the Trump Empire trumped the S&P 500 from at least that date.  Picking 1988, as the AP pointed out, would leave Donald short using either his or Forbes’s estimate of Net Worth – while 1982, as Matthews noted, would split the two (around $6.3 billion using the default values in the reinvestment calculator.)

My problem with the estimates to this point?  Tax rates.

You see, when I designed the calculator, I did a ton of research on marginal taxes for the median income earner.

However, Trump isn’t your median earner – he likely would have hit the top tax rate every single year after taking over a $200 million firm in 1974.  Furthermore, he resides in Manhattan – it’s no secret that New York City and State have the highest combined tax burden of any locality (Cameron and I both live in the Bay Area and they even edge us out!).  So, I did some research and came up with some reasonable tax rate estimates for New York City over Trump’s career.

Note: the far left column is what the tool provides by default when you load it.  The far right column is my estimate for dividend taxes for a-Donald Trump-like-investor since 1974.  These numbers are my estimates based on work from The Tax Foundation, Marilyn Marks Rubin for John Jay College, The Fiscal Policy Institute, and (perhaps hilariously) a 1995 New York Office of Tax Policy Analysis report to Governor George Pataki.  Verify them yourself if you wish to cite them elsewhere.

These numbers should be very close, but I’m not a tax historian.  I attempted to back out the marginal tax rate in the state from the federal rate due to deductions, but tax law is insanely complex so take everything with a grain of salt.  I did not try to factor in the Alternative Minimum Tax.  (If you want to use those numbers in our tool, copy the table into a spreadsheet, delete the 4 middle columns, then paste the dates and final marginal rate into the periodic reinvestment tool‘s tax entry form under ‘Advanced’.)

With those numbers, I reran the Donald Trump Math for various scenarios.  The numbers below are after dividend taxes but before selling, so there would be capital gains taxes as well.  (Yes, there would be capital gains taxes with his current holdings and business too, I’m just anticipating the question).

Is the S&P 500 Even the Right Benchmark?

Maybe you don’t like the golf courses, the resorts, the skyscrapers, and the naming schemes The Trump Organization provides the world.  Maybe you don’t like the fact that 4 businesses associated with Trump have declared bankruptcy.  Maybe, even, you don’t like the man himself.

However, you’ve got to harbor some grudging respect for the empire – instead of mailing a check to a mutual fund (or money managers, since S&P 500 index funds didn’t even exist until 1975!), he grew his father’s business into an even larger business.  CNN Money estimated that the empire, in its current form, is responsible for roughly 34,000 jobs.  As you know, the marginal cost for mailing a $40,000,000 check to a large fund is pretty low – SPY, an ETF tracking the S&P 500, has roughly $165 billion under management (as of 10/1/2015) and moves 130 million ~$200 shares a day.  That $40,000,000 represents, then, 200,000 trades – or about thirty six seconds worth of volume.

There is no argument where adding $40 million to an already huge ETF or mutual fund or even turning a $165 billion fund into a $175 billion fund would have the impact, for better or worse, that The Trump Organization has.

Nor do index investors often run for President on the strength of their mutual fund returns!

So, yes, if you look at the totality of Donald Trump’s career, he defeated the S&P 500 – especially with the onerous tax burden present in the 70s and 80s (and no, he wouldn’t have been able to pump a 401(k) and IRA like Mitt Romney).  A few dates along the way Trump might have trailed (he didn’t generate alpha every year, but then neither did Warren Buffett), but considering his rise from $40,000,000 to the three comma club by 1988, it would have been weird for him to suddenly ditch real estate to invest in mutual funds.

So, my point remains – the S&P 500 itself might have competed favorably with Trump’s rise in net worth.  However, once you throw taxes, management fees, and the sheer impact of Trump’s companies and business dealings (not to mention the springboard to run for President), there is no reasonable argument that Trump picked the wrong path.

Donald Trump beat the S&P 500 once you factor in taxes, or start the math from a more equitable date than the beginning of a massive S&P 500 bull market.