Investing for What It's Worth
Having begun his career with a “modest” inheritance of around $100 million, is Donald Trump now worth $3–4 billion, or in excess of $10 billion? As described in this article by Reuters’ James Saft, it depends on whether the media’s estimates or Trump’s own proclamations are closer to the truth.
For practical purposes, it’s a moot point either way. Of greater interest, Saft’s article also explored an alternate universe, in which Trump decides to skip all of his high-profile business dealings, plop his original nest egg into a basic, index-based investment strategy and let the market do the heavy lifting for building his net worth.
We’ll reveal the results of that clearly fictional fantasy in a moment. But first, I want to share an anecdote about another larger-than-life personality, Mad Money’s Jim Cramer. If the name doesn’t ring a bell, he’s that stock-picking guy who’s known for shouting “Booyah!” when he gets excited about his forecasts – or at least when he wants you to get excited about them.
Earlier in the year, retired finance professor David O. England tried to bet Cramer a BBQ dinner that the 49 stocks Cramer had just touted as “perfect,” downturn-beating bets would not, in fact, collectively close higher six months hence. Cramer did not take the bet nor even reply to the challenge, but England went ahead and tracked the 49 stocks anyway.
In both of these illustrations, the market proved to be a solid contender when it comes to accumulating wealth without having to work so hard at it:
With Trump’s inheritance, Saft estimated that he could have invested it in an S&P 500 Index fund (which doesn’t even pick up some of the higher-returning asset classes available through global index investing), and accumulated around $3–8 billion. “[T]here is a substantial possibility that Trump would have been financially better off sipping cocktails at the beach as his money compounded in index funds,” says Saft.
And had Cramer accepted England’s bet, he would have been the one to pick up the dinner tab. Nearly three-quarters of his picks (35 out of the 49) were priced lower than they began after succumbing to the brutal 2015 third-quarter downturn.
It’s worth noting that the Cramer vs. England article did not make the more apples-to-apples comparison we would have preferred to see: How did each pick fare compared to its most appropriate benchmark? But Trump’s and Cramer’s illustrations still make a powerful statement about how to best use one’s investment energy.
Does it make sense to aggressively chase individual stocks or build a property management empire in pursuit of fame and fortune? It depends what you want out of life. Frankly, the notion of Trump or Cramer embracing passive, index-based investing for the bulk of their wealth seems about as plausible as spotting Big Foot having a chat with “Nessie,” the Loch Ness monster. For personalities as large as theirs, the craving for fame and the lifestyle that accompanies it may (no pun intended) trump the desire to invest their assets as efficiently and effectively as possible.
That’s probably fine for them. Unless there’s more than meets the eye, they each seem to be enjoying their lives so far. Plus, maybe they are greasing the wheels of our economy and helping to keep the markets liquid with their high-end entrepreneurial activities.
But it’s important to remember that the many, many rest of us don’t give much priority to appearing regularly on prime time television, nor do we wish to apply our hard-earned wealth for that purpose. Instead, most of us are investing toward our and our family’s personal life’s goals. We want to achieve financial freedom to enjoy our careers, retire when we’re ready, and leave an appreciable legacy to our loved ones.
So, for the rest of us, the evidence remains clear. Your best bet lies in crafting a financial plan that reflects your own goals, investing in low-cost funds that let you efficiently participate in the market’s expected long-term returns, and getting on with the rest of your life. By turning to evidence-based investing, even if you never end up trending on Entertainment Tonight, you can expect to go far. Let us know if we can help you with that.