Is Trump Smart Because He is Rich? Or Rich Because He Is Smart? Is He Even Rich?
I told my wife a number of times that my guess is that Trump won't release his taxes because they don't show nearly enough income to justify his ego. Time and again I see he and his cohorts and even the media throwing around eye-popping revenue numbers for him. Well, I can tell you from long, sad experience that merely having large revenue numbers won't get you anywhere - they have to actually be higher than expenses to be meaningful. I was a part of several early Internet startups that rode tens of millions of revenue right into liquidation.
Here is my hypothesis of what makes Trump rich:
- He started with family money. No shame in that, lot's of people have done productive things with the capital accumulated by prior generations of their family. But in Texas we used to have a saying -- the best way to make a million dollars is to start with $10 million. Is Trump's fortune larger today than it would have been if, say, he had just shoved all of dad's money into stocks?
- He has the political clout to swing real estate deals average people cannot. Real estate in New York and Atlantic City is entirely driven by crony capitalism, and Trump is a master. Let's say I have a piece of land that is worth X. It would be worth X+Y if I could build the building I want on it, but I can't get the permissions I need. Trump can, buys it for X, and then makes Y profit from his political pull. The example of his getting his cronies in the Atlantic City government to condemn a woman's home so he could pave it over for limo parking is just the ugliest of many, many such examples.
- He extracts rents from investors, even when investors lose money. I don't know if there is an economic name for this, but there should be. Trump's investors, particularly his bondholders, have frequently lost millions on his real estate and casino investments -- both in his many bankruptcies and his frequent debt restructurings, which he brags about on the campaign trail. These investments are losing money and going bankrupt, so they can't be generating free cash flow. Somehow Trump is saddling investors with the losses AND extracting income for himself personally. Steven Job's lifestyle was paid for by people who voluntarily bought iphones and valued them enough to pay more for them than it cost to make them. I hypothesize that Trump's lifestyle is paid for out of invested capital, and not out of profits. Which of course leaves open the question of why investors continue to sign up for this treatment. I understand why donors give to the Clinton Foundation despite the fact that the Foundation does relatively little actual charity work -- donors are looking for influence with the Clintons. But why do Trump investors keep dumping in more money? Could it be charisma? Certainly Trump has an excess.
- Trump's best investments seem to be ones where his charisma comes into play -- his TV shows come to mind. Beyond the TV shows, there is a long string of business failures, from steaks and schools to casinos.
Postscript: To be fair, I will add that I have in the past been a fan of his hotel on the strip in Las Vegas. The hotel provides a screaming good value (you can almost always get a huge discount off rack rate) for an exceptionally nice room in a good location -- and in a non-casino hotel to boot. I used it for years as a low-cost location for manager meetings. The staff there is great -- the only problem is one has to look past the tacky gold gilding on everything and the goofy Trump-branded swag in the gift shop. I will add, though, apropos to this post, there is no way on God's green Earth that this hotel makes money, at least if it is paying all of its capital costs (it is possible there was a bankruptcy at one point where Trump said "you're fired" to the bondholders). If you ever stay there, by the way, it has the best view of the strip in Vegas because it is right at a bend and can look straight down the street. Ask for a high room on the south side.
Update: LOL, looking at #3, I think we do already have a name for this phenomenon of extracting rents from investors even when the investments are losing money -- it is called a hedge fund. Given that hedge funds generally do not consistently outperform the market and result in outsize compensation for their managers even when the fund loses money (pretty sure Chelsea Clinton's and her husband did not give back any of the management fees they pulled down despite their hedge fund tanking most of their investor's money).
Update #2: Being a billionaire is no guarantee that one knows anything about even basic economics: Nick Hanauer argues the way to prosperity is to impose a $28 minimum wage.
Chris:
#2 seems to be a good quality of a candidate for political office
May 31, 2016, 11:30 amkidmugsy:
Opining as an impartial foreigner, I can't see any reason to vote for Trump except the decisive one: the alternative is Mrs Evil.
May 31, 2016, 11:35 ammx:
Re #1, some have said Trump is well behind the S&P 500 (http://finance.yahoo.com/news/why-probably-better-investing-donald-233020366.html) and others aren't so sure about that (http://www.politifact.com/punditfact/statements/2015/dec/09/occupy-democrats/occupy-democrats-say-simple-investment-trumps-fath/). It's a hard comparison to make because we don't really have all the data. In particular, it's hard to get a handle on Trump's current net worth, which he testified in a deposition (http://money.cnn.com/2011/04/21/news/companies/donald_trump/) varies depending on his personal feelings at the moment.
And while that's an absurd statement on the one hand, it makes a little sense when you consider that much of his recent real estate activity hasn't involved real estate at all, but merely licensing his name to other developers who use it to attract buyers (http://www.nytimes.com/2011/05/13/nyregion/feeling-deceived-over-homes-that-were-trump-in-name-only.html?_r=0). Those buyers are then sometimes surprised when the deal goes south and they find out that The Donald had nothing to do with the project.
In any case, based on the available data, you can make a decent case that Trump's investment performance is at best, more-or-less the same as if he had stuck it all in an index fund and taken up croquet for the last few decades, quite possibly substantially worse.
May 31, 2016, 11:56 amherdgadfly:
Is Trump smart? No because he lies incessantly and because he speaks about himself most of the time during his lies. Is Trump rich? Not as rich as he claims and he likely gained his wealth through dealings with the Mafia and the construction unions and by taking it from his creditors, investors and employees.
Next week, children, we will cover Trump ethics, Trump principles, and Trumps conquests.
May 31, 2016, 3:39 pmGoneWithTheWind:
I believe Trump has proved he is quite intelligent both when he was in school and as an adult. I think what a lot of people don't understand is Trump's personality and the way he talks are typical New York. If you are expecting him to put on airs and try to impress you I do believe you are wasting your time. But to interpret his style as an indication of him not being smart I would simply assume that you either don't know many New Yorkers OR you are grasping at anything you can use to tear him down.
May 31, 2016, 5:50 pmano333:
I would have thought foreigners would prefer Hillary's finger on the button to Donalds, since the ICBMs are aimed at you...
June 1, 2016, 7:53 amDavid in Michigan:
The blog article and MOST of the comments here are pure azz speculation and hate mail. Really, is that all you got......??
June 1, 2016, 10:45 amMJ:
I've known several New Yorkers, and none of them are as irritating and self-absorbed as Trump. He's not at all what I'd call typical New York. He's constantly trying to impress me and anyone else he comes into contact with. Why else would he talk about himself as much as he does, or constantly try to get himself in front of a TV camera?
June 1, 2016, 11:20 amMJ:
There is no reason to vote for either of them. They're both terrible candidates. The saving grace of the US system of federal government is that there are enough checks and balances built into it that it limits the damage that any one president or member of Congress can do. Many people bemoan political gridlock, but gridlock is often far better than the alternative.
June 1, 2016, 11:20 amkidmugsy:
Good Lord, no. He's an unknown quantity whereas she's a highly experienced warmonger. She'd be rattling the bear's cage in no time, and attacking God knows which country next. "We came, we saw, he died".
June 1, 2016, 11:39 amhttps://www.youtube.com/watch?v=Fgcd1ghag5Y
Jens Fiederer:
The Nick Hanauer link is broken
June 1, 2016, 12:12 pmCraig:
But then we wouldn't have all these great buildings.
June 3, 2016, 8:52 pmScott Zorn:
Coyote, I'm happy for you, because it sounds like you still have that part of your soul that you lose the first time you pay off a cop, or the part you lose the first time you pretend you don't hear anything when you're walking the property and the wife is screaming and being slammed against the wall, or that other part that you lose when there is a single mom with three kids who look pretty thin and you tell them they have to leave and they say they have nowhere to go and you don't say anything more except " you have to leave", but guys like trump and I, we know these feelings very well, and we forgot, a very long time ago, about right and wrong, and can only remember having or having not and there is no middle ground, there is only winning because the alternative is poverty which is something I will not accept and the old sentimental
June 6, 2016, 10:15 pmWoman be damned. I'm not sure how much of trumps money is family money becuase I'm not sure another kind of money exists. when the government controls everythingish, either you have political clout or you have nothing. As far as "extraction rent from investors," we in the business like to call that "project management fees," and if you don't want to pay me to do it go ahead and change the doorknob yourself. Sure, it's corrupt, but I'm afraid that you fail to grasp that when you are surrounded by corruption if you aren't willing to be corrupt you will be nothing. You might make a salary, but you will never be trusted. I'm happy for you that you've never gone through a bankruptcy, but private lenders are clever enough and tend to come out alright. If my property underperforms and I'm the one who knows how best to run it, you'll be happy to restructure and make more money.
As far as did he outperform the 12%+- that he would have annually earned in stocks had he chosen that, besides the basic principal of creating real tangible value instead of turning over capital to a financial advisor, something I would've thought you'd understand, the answer seems to be overwhelmingly yes - if not from actual returns, his children and grandchildren will
Inherit a name synonymous with wealth, right or wrong, which is something guys like trump and I understand, perhaps in a way you never will, be use you aren't corrupt and you still have all those little nice spots in your heart guys like trump and I lost a very very long time ago, and it's hard to put a dollar figure on that, or the feeling that I had when I was 9 and I went into trump tower and saw what a waterfall looks like inside and that some necklaces cost more than $25k and my grandpa told me "scott, you don't have to spend you're money on this sort of thing, but I want you to see that in this country.there is no limit to what you can achieve."
I'll vote for trump, and trump will win, and he will be a great president. I'm sorry you don't like his hair, I'm sorry he seems cocky, I'm not sure if want to have a beer with him, but I'm simply besides myself that you're joining the self-pity choir of "I hate trump because he's a jerk and I'm not sure he deserves to be rich." I don't know you but I know you're not like that.
TruthisaPeskyThing:
I certainly have not studied Trump's bankruptcies, but I have heard it said that they were Chapter 11 and not Chapter 7. If so, the main feature of Chapter 11 is restructuring debt, not writing it off. Is it possible that his investors have not actually lost big time, but rather have repayment on less attractive terms than originally promised?
June 7, 2016, 12:29 pm