Trump the Survivor

When you study investment management in business school, one of the first things you discuss is the following hypothetical: Take 1,024 investment managers. At the beginning of the year, randomly choose 512 of these managers to send out letters to prospective clients predicting that the stock market will rise that year; the other 512 will send out letters predicting that the stock market will fall.

At the end of the year, take the 512 who were randomly correct, divide them in two again and repeat the exercise: 256 predicting an up market and 256 predicting a down market. At the end of 10 years, you are down to one person who has "called" the market for ten years running. Everyone thinks that he is a genius. But he isn't. He is just a random survivor. Hence the name for this fallacy: "survivorship bias."

Think of this the next time you hear Trump mouthing off about being a "world class businessman." The world of real estate, where Trump has made almost all of his money, is particularly prone to survivorship bias. The more volatile the underlying process, the more pronounced is the effect. And nothing is more volatile that real estate, particularly leveraged real estate in a major city (like New York). This is exactly the field where Trump has played out his career. Nearly half of his wealth is tied up in buildings within a four-mile radius of his extravagantly tasteless apartment in the Trump Tower.

As I pointed out before, Trump was bankrupt in the early 1990s. This was a time when the gods of chance randomly assigned him the losing bet. He was saved in that episode through his and his father's political connections, his father's money (which he used to pay off some of his more aggressive creditors) and the old truism: "Borrow $100 and you have a banker. Borrow $1 billion and you have a partner." Still, in the world of investment analysis, this is known as a "100% drawdown," and it is usually taken as a big red flag.

Others have approached Trump's business career from another perspective. The Economist has recently run an article that, among other things, analyses Trump's investment performance. Using data from Forbes magazine's annual rankings of the wealthy, which is certainly a more accurate picture of Trump's opaque holdings than anything that Trump claims, The Economist finds that his investment performance has been mediocre at best. Going back to 1985, the first year that Trump appeared in the rankings separately from his father, and indexing his wealth versus the S&P 500 or Manhattan real estate generally, Trump would today be either 1.4 times as wealthy (if he sold everything in 1985 and reinvested in random properties in Manhattan) or 2.8 times as wealthy (if he reinvested in the S&P 500).

Matt Levine, one of the sharper knives in the BloombergView drawer, did a review of the Trump-versus-index analyses that was a little more favorable to Trump, pointing out how assumptions-dependent they are.[1] But still the overall conclusion is the same: The claim that Trump is some kind of business genius is far from proven.

The sad thing is that, if you point out the fallacies, shallowness and inconsistencies of Trump the political candidate to one of his supporters, the single most likely response you get is: "If he didn't have smarts/good judgement/good advisors/good character/etc., then he could have never gotten to where he is in the business world." Actually, this may not be true. He may just be a survivor.

[1] Such as assumptions about the starting year for the analysis, the rate of consumption, the tax effects, etc.