Senior U.S. Senator from Massachusetts Elizabeth Warren took to Twitter yesterday to express her frustration with Republican Party U.S. presidential nomination front-runner Donald Trump’s braggadocio with regard to his business acumen and investing prowess. Research shows that Trump’s personal net worth might have been similarly served by an index fund, as compared with his real estate activities, and that investing guru Warren Buffett has outperformed the candidate, and significantly so.
Senator Warren refers to articles published in the financial press in the months following Donald Trump’s financial disclosure, made under his obligations as a presidential candidate, as reported by Business Insider, comparing his ability to grow his personal net worth with what an investor in an index fund might achieve, as reported by Bloomberg.
Listen to experts who say @realDonaldTrump might have more money today if he’d put his inheritance in an index fund & left it alone.
— Elizabeth Warren (@elizabethforma) March 21, 2016
What is an index fund? Since the late 1800s, companies like Standard & Poor’s and Dow Jones & Company have calculated and published averages of groups of stock prices. The Dow Jones Industrial Average (^DJI), at its essence, is the prices of 30 stocks added up and the result divided by 30 — splits and dividends are accounted for as well.
Through the 20th century, mutual fund companies sprang up, and over time it was observed that many mutual fund managers had difficulty outperforming averages like the Dow Jones. This resulted in the birth of an entirely new industry: the index fund industry, as reported by Investopedia.
See how @realDonaldTrump kept his father’s empire afloat using strategic corporate bankruptcies to skip out on debt.
— Elizabeth Warren (@elizabethforma) March 21, 2016
The Vanguard Group was one of the first to offer index funds. Today, the company manages close to $3 trillion in assets. In addition to offering traditional index-based mutual funds, Vanguard offers exchange-traded funds like the Vanguard 500 ETF (NYSE: VOO) that closely tracks the performance of the S&P 500 Index (^GSPC).
According to Bloomberg, if Donald Trump had simply taken his inheritance of $40 million in 1974, invested it in the S&P 500 Index, and didn’t spend any money, he would have about $2.3 billion today. Bloomberg also estimates Trump’s net worth as being close to $2.9 billion; Forbes puts the number near $4.0 billion. The valuation of the Trump brand is something the financial press has consistently grappled with and is one factor that results in variations in reports on his worth.
Trump’s financial disclosure shows interests in an almost never-ending list of private LLCs, as well as accounts with several financial institutions that hold a long list of securities, including dozens of stocks.
“Keep all your eggs in one basket, but watch that basket closely,” Berkshire Hathaway Inc. (NYSE: BRK-A, BRK-B) Chairman and CEO, and one of the greatest living investors, Warren Buffet has been quoted, as reported by Wiley.
“Broad diversification is plainly and simply often a hedge for ignorance,” founder and chairman of Investor’s Business Daily, William O’Neil has been quoted.
Large mutual funds, of the type run by The Vanguard Group or Fidelity Investments, are mandated to remain fully invested at all times, as well as attempt to match the performance of averages like the Dow Jones and S&P 500, necessitating portfolios that include hundreds of stocks, something that Warren Buffett and William O’Neil see as unnecessary, particularly for seasoned investors, as Donald Trump portrays himself.
Donald Trump’s portfolio does tell another story. The Republican candidate has, on more than one occasion, spoken of entertainers or politicians coming to the reported billionaire, asking for money, as reported by the Daily Mail and NPR.
It isn’t hard to imagine anyone who knows Trump and sells financial products and services, or has a family member who does, approaching him with a sales pitch. It appears that if Trump is presented with a competitive, reasonable proposal, he will almost certainly say yes, especially if he likes the person.
On its own, does this type of seemingly laissez-faire attitude make Trump a decent person? Sure it does. However, does it suggest that Trump possesses the business savvy that would seem to be preordained, given the legendary Trump name?
Compared to Warren Buffett, the growth of Trump’s capital has been downright average.
While Trump’s 1974 $40 million inheritance might be worth about $2.3 billion today had he invested it in the S&P 500, the more telling figure is what Trump could have earned if he had invested with Warren Buffett.
Donald Trump’s $40 million inheritance, invested at $40 in BRK-A shares in 1974, as reported by All Financial Matters, would be valued at about $198 billion at the end of 2015, an astounding amount.
In other words, Warren Buffett has produced about 50 times the returns that Donald Trump has. Trump’s investing prowess, at best, compares well with index funds held in the retirement accounts of average Americans.
[Photo by Paul Morigi/Getty Images for Fortune/Time Inc]