Whatever critics might say about failed presidential candidate Mitt Romney, everyone at least agrees that he has done well for himself as a businessman. There is no such consensus regarding Donald Trump, the front-runner in this year's Republican primaries, who touts his experience in business -- particularly his ability to negotiate -- as his strongest qualification for the presidency.
Trump's sub-par record as a businessman has been widely discussed, but a recent analysis suggests the extent of Trump's underperformance is vastly greater than previously recognized. The new results emphasize the degree to which Trump has relied on his family's wealth and connections in order to create his fortune.
"Isn't he a huge business success? Doesn't he know what he's talking about?" Romney asked in a speech Thursday. "No. Look, his bankruptcies have crushed small businesses and the men and women who work for them. He inherited his business. He didn't create it."
Last year, Wonkblog examined Trump's performance as an investor based on public estimates of his wealth, including his own claims. His numbers were not only worse than those posted by skilled investors such as Warren Buffett, but Trump has made even less than a Main Street investor would by buying decent run-of-the-mill mutual funds to save money, if that investor had started with as much money as Trump did.
In response, several readers wrote in to defend Trump, complaining that comparing the real-estate business to the stock market is comparing apples to oranges.
That's true, but it turns out that making money in real estate has been even easier than making money in stocks during the past several decades. Compared to other investors in his business, Trump's performance looks much worse than when compared to ordinary people who save money in the stock market.
In 1976, Trump told the New York Times that he was worth $200 million. Had he put that money in an ordinary fund based on the Standard & Poor's 500-stock index, the kind that many people use to save money for retirement, he'd have $12 billion today. That is more than the $10 billion he has claimed he is worth. Bloomberg estimates his wealth at $2.9 billion.
Yet compared to that of the average real-estate investor over the same period, Trump's performance is even worse, according to John Griffin, a businessman and a real-estate investor who is also a professor at the University of Texas at Austin.
Griffin used an index of funds known as real-estate investment trusts, or REITs. The managers of these funds rely on their expertise in real estate to earn money for their clients by buying and selling interests in commercial property.
This index has earned 14.4 percent a year since 1976. Had Trump done as well as the average among others in the industry, making investments that returned 14.4 percent over the long term, he would have turned the $200 million he said he had in 1976 into $23 billion as of last year, Griffin calculated.
Trump is "an underperformer relative to his peers," Griffin said. "If we want somebody else with good investment experience to run for office, we can pick the average guy running a REIT fund."
Independent estimates of Trump's wealth yield similar results.
In 1978, Business Week estimated that he was worth $100 million, about half what Trump claimed at the time. Had he invested that money in the stock market, he'd be worth about $6 billion today - twice the $2.9 billion that Bloomberg estimates he is worth now. Had he done as well in real-estate as the average among other investors working in the industry, he'd be worth $8.6 billion, according to Griffin.
Even Business Week's estimate might have exaggerated Trump's wealth in 1978, judging by Trump's tax returns from that time. If so, Trump's performance over the period could be less catastrophic than it appears based on these figures.
Yet there is another factor that suggests these figures actually minimize Trump's underperformance.
In general, an investor who borrows heavily should perform better than average, since the person has more money to invest. Investors can pocket the difference between the interest paid to the bank on loans and the returns on the investments they make with the money, if they're good investments.
Trump is fond of saying that his businesses' multiple bankruptcies only reveal his skill in using the laws and the courts to get an advantage over his rivals. They also reveal that, unlike many investors, Trump borrowed heavily to finance his real-estate projects.
Griffin cited one estimate, from 2000, that Trump's businesses relied on loans totaling 69 percent of what he had put into his projects with his own money. By contrast, the same figure for the funds in the real-estate index is about 36 percent on average, reflecting the fact that many managers have taken a more conservative approach to investing.
Griffin's figures on Trump don't account for the improved performance that would be expected from an investor who is so leveraged. Conversely, current estimates of Trump's wealth overstate his success, since they don't account for all the money he lost when his businesses went under. His creditors absorbed those losses.
"Somebody paid for those bad decisions, and those were his business partners and the banks that loaned him money," Griffin said. "If he plays that strategy with our country's money, who picks up the tab?"
Some have noted that Trump has a lavish lifestyle, speculating that his personal expenses might explain his underperformance. Yet the real-estate index accounts for the fees that managers pay themselves as a salary -- about 1 percent of their assets, on average.
Assuming Trump had performed as well as the average manager while also devoting just 1 percent of his assets to his lifestyle, not only would he be worth $8.6 billion today, he'd have eight figures a year in play money.
Trump's record is a striking contrast with Romney's, who called Trump a "phony" and a "fraud" in his speech Thursday.
In 1984, Romney founded Bain Capital, which has been roundly criticized for laying off workers at the companies in which it invests. All the same, no one can dispute that Romney made boatloads of money.
He established Bain with an investment fund of $37 million. The firm now claims $70 billion in assets under management. According to Forbes, Bain's average return on its investments was 173 percent under Romney's leadership. He was so popular with investors that he was able to charge a fee of 3 percent, instead of the 2 percent most of his competitors offered.
Romney is not a billionaire -- he was worth only about $230 million in 2012, according to Forbes. That's partly because he left Bain to pursue his political career, and the firm has struggled since his departure.
One reason that Trump is a multibillionaire, while Romney isn't,
Both men came from wealthy families. As the New York Times reported, Romney's father gave him a loan that he used to buy his first house, for $42,000. While Romney had all the advantages that come from growing up in a wealthy and well-connected family, this is the only evidence of tangible financial assistance from his parents.
Trump's father, however, helped him throughout his career with millions in loans. As The Washington Post's Glenn Kessler explains, Fred Trump was one of two guarantors of a $70 million construction loan from the bank Manufacturers Hanover that financed one of Donald Trump's first major project, the Grand Hyatt in Manhattan, in 1978. Fred Trump also arranged for an unsecured line of credit from Chase Manhattan in the amount of $35 million for his son, which he also used to build the hotel.
Finally, Fred Trump extended a dubious loan to his son for $3.5 million, with casino chips from one of his son's failing casinos as collateral. Regulators later declared that loan illegal.
Fred Trump's connections helped Donald Trump get his start. Since then, he has consistently underperformed relative to the real-estate industry as a whole.
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