Trump: Less Than Meets the Eye

“There is no there there.”

                                                                                                Gertrude Stein

Many years ago, Saturday Night Live did a bit called “The Thing that Wouldn’t Leave.” As I recall, John Belushi played the part of the dinner guest who refused to get the hint, hanging around long after his exhausted hosts were clearly ready for bed.

I feel that way about Donald Trump. His persistence atop the polls, despite statements that to me appear radioactive, and debate performances that combine ignorance with bombast, continually confounds my expectations.

So as a citizen, Republican, and conservative, I’m going to take another swing at the noisy excrescence that is The Donald.

A considerable part of Trump’s raison d’etre (reason for being, not just reason for running) is his oft-repeated claim to be smart and rich. “I’m, like, a really smart guy…I’m worth ten billion dollars.”

At the moment, Trump is in fact quite rich. Probably about one-third as rich as he claims, as discussed here. But almost certainly a billionaire. And surely he must have been pretty darn smart to get there…or perhaps not.

Recently several substantial news organizations have looked at a fairly simple question. How has Trump done as a businessman/investor, compared to how he might have done if he had simply taken the money he inherited from his father, a highly-successful real estate developer, and placed it into an utterly passive investment, a S&P 500 Index Fund?

The answer, pretty clearly, is not very well, as noted and here and here. Long story short, Trump has made about half as much, with all of his Trump-branding of casinos, office buildings, golf courses and condos, as if he had simply taken his inheritance, bought the Vanguard Index 500 mutual fund, and wandered off to spend the next few decades playing golf on a course he did not own.

And this is before adjusting for risk, and for opportunity set. In terms of risk, Trump has used leverage freely. He has swung for the fences, not once but many times. He’s taken enough risk to have his public company, once Trump Casinos and Hotels, more recently Trump Entertainment, go bankrupt four times.

And consider the opportunity set Trump confronted when he got started. Trump’s father put him in charge of a successful New York real estate development company in 1975. New York has, in the years since, floated atop a tidal wave of investment success. The stock market went up more than twenty-fold. When we talk about the richest 1% in the United States, we are talking largely about New York City. Surely there can have been few better places on the planet to have owned and developed real estate. Surely there can have been few better-heeled customers than Wall Street and its moguls. And yet Trump earned returns roughly half as large as those realized by a sensible mail carrier who put his Federal savings plan into a stock index fund.

One of the great ironies of Donald Trump’s life is his own utter lack of irony. It is entirely clear that Trump believes every one of his self-aggrandizing assertions. He believes himself to be the Titan of the age, one of the great businessmen of his time. It simply isn’t true. He is a guy who inherited a pile of money and a single-syllable Anglo-Saxon last name, engaged in a whirlwind of activity, relentlessly promoted his name and brand, and after four decades ended up with a larger pile of money, which he believes wrongly to be the result of his own activity, but which was actually simply the consequence of the swiftly-rising tide that made many others richer still.

Donald Trump was born on third base, re-named it Trump Terrace, and believes he hit a triple. He got thrown out four times trying to steal home. And he proclaims himself, to everyone who will listen (far, far too many of my fellow Republicans) one of the greatest hitters of all time. He is a fraud.

If Trump remains a player in the Republican field, at some point I promise to share what I really think about him.

Against the Wind

“Do you want to know how to get rich in the market? Come closer. Close the door. Be greedy when others are fearful. Be fearful when others are greedy.

                                                                                                     Warren Buffett

I’ve written a few times lately about optimism and pessimism, and passed along the observation of one long-term client that the tone of my recent postings has been too negative, so much so that he no longer passes along our material to potential referrals.

I’d like to share a few data points, offer a bit of mild pushback against the accusations of inappropriate pessimism, and then ruminate a bit on one of the paradoxes of investment management.

First data point: The last month saw a reversal of the public’s recent stock buying, with huge flows from stocks to bonds. It is a cliché, no less true for being so-oft repeated, that individual investors always get it wrong, especially at inflection points. After almost five years of market recovery, with the S&P up more than 175% from the March 2009 low, investors began to buy stocks in late 2013. (In other words, they missed a bull market that more than doubled the price of equities.)

The sharp downdraft in January destroyed that emerging confidence, and individual investors stampeded from stocks back into bonds. But they did not exit at the S&P 500’s intra-day market high of 1847 on January 21. They jumped out in time to catch the intra-day low on February 5, when the market was down almost exactly 6%. And thus missed last week’s rally, during which the market gained 3.4%, erasing most of the prior loss.

Second data point: Investors are fleeing emerging markets stocks in droves. As this article makes clear, the last time the investing public turned similarly bearish on EM stocks, in 2002, the next five years saw annual returns on emerging markets of over 30%.

Which gets back to our recent pessimism. The mass of individual investors are at the mercy of their own dysfunctional psychology, getting in and out of the markets at precisely the wrong times. As stewards of our clients’ portfolios, we have two principal jobs:

1) Make, and implement, good investment decisions.

2) Keep our clients from harming themselves by over-reacting to market events.

If we are doing those jobs as well as we possibly can, we will assist our clients in maintaining an even strain, by letting some steam out of the psychological balloon when the markets are over-priced (during bubbles and late in bull markets), and pumping them up with optimism when they are under-priced (during panics and bear markets). Hence our cautious stance over the last year or so.

Here is the paradox. The way for clients to get rich is to behave against the crowd, as Buffett has often observed. Yet the way for an adviser to best attract new clients is to validate their emotions, not to challenge them, especially when those emotions are most excited.

Paradoxically, by doing what is right for existing clients (counseling prudence at market tops, maintaining optimism at market bottoms), we make it harder for our firm to attract new clients. The answer to the perpetual question, “If you’re so smart, why ain’t you rich?” is that being smart makes us periodically unpopular. My own experience is that challenging a client’s emotions can make me persona non grata. I’ve had a few clients over the years whom I kept from selling out in bad markets, and who never forgave me. They ignored the thousands, tens of thousands, hundreds of thousands, even millions of extra dollars they earned by owning stocks during the recovery, but held onto their bitter resentment over my failure to take counsel from their fears. (As one client said, “You just don’t want me to have any feelings.”)

So here is a statement about what sets TGS Financial Advisors apart from most of our peers in the retail advisory space: We are more committed to your long-term financial security than we are to your short-term psychological comfort.

And if you are a friend of the firm, and don’t think we are telling our story very well to prospective clients, consider saying this to the friend, relative or colleague you’d like to send our way:

“My advisor really beat me up to stay invested during the panic back in 2008-2009. I’ve made a lot of money in the market since then. Now he’s telling me to be careful. Did your advisor keep you invested back then? Is he watching out for you now? Maybe you need a second opinion.”

Last Bear Standing?

Over the last few weeks, there has been a steady trickle of headlines about formerly-bearish money managers and commentators who have jumped (or slunk quietly) onto the bull-market bandwagon.

One such is Hugh Hendry, a hedge fund manager who shorted financial stocks in 2008, earning a 31% return in a year when most investors lost big. As is all too usual in the hedge fund space, this made him a rock star, got him lots of exposure, and attracted millions to his fund. Which, somewhat predictably, did nothing much for the next five years, as Hendry maintained his prediction that worse was yet to come. Referencing the possibility of a Greek default in 2010, Hendry commented, “I suggest you panic.”

Last month, Hendry announced that he has now become a trend-follower, and is going long stocks. This after a 160% advance in the markets since the March 2009 low, all of which he missed.

Another perma-bear has been Paul Farrell of MarketWatch, who I singled out as an especially worthless analyst in a prior post. After years of advising individual investors that the game is rigged against them, even predicting the collapse of the capitalist world system and suggesting buying a farm in the mountains and stocking it with canned goods, he suddenly turned bullish in late October. A recent headline tells the story of Farrell’s conversion: 12 get-rich sectors for a hot 2014 bull market.

Of course, Farrell is an idiot. But some of the others advertised as new bulls are not. Of particular interest is Jeremy Grantham of GMO, who we at TGS regard as one of the world’s smartest asset allocators.

Grantham has recently been advertised as a bear-turned-bull, with a Barrons headline pretty typical: Jeremy Grantham’s Bullish Two-Year Outlook. (The Barrons article is behind a paywall, but GMO’s quarterly newsletter, from which Barrons and others conclude Grantham is now a bull, is not.)

Given that Grantham is on our very short list of investors too savvy to ignore, this would be a huge change in viewpoint, and would certainly cause us to question our own cautious investment stance. Even a cursory reading of GMO’s recent newsletter, however, suggests Grantham’s opinion has hardly changed.

GMO’s newletter actually starts with Paul Inker’s analysis, titled Breaking News! U.S. Equity Market Overvalued! Hardly bullish. Grantham then discusses the reasons he believes the U. S. stock market is significantly over-valued, but suspects that irrational investors, emboldened by easy money, are likely to drive it higher before the bubble inevitably pops, finishing the three-time cycle of easy money leading to asset bubble leading to market bust (2000, 2008, and perhaps 2015).

We pretty much entirely agree. This is why we have increased our cash position, and tilted our sector choices so heavily toward managers running lower-volatility portfolios and owning higher-quality stocks.

As John Templeton pointed out, bull markets usually “die amidst euphoria.” We’re not there yet, but we are already past the point where further gains will be based primarily on economic fundamentals. As usual, we remain long stocks, but we are no longer over-weight, as we were from October of 2008 through summer of 2013.