We may not have his tax returns or a valid report on the state of his health, but we do have some idea as to how Donald Trump invests.
Steven Goldberg of Kiplinger.com has gone digging into Trump’s investment strategies and wrote an article about his discoveries called “How Donald Trump Invests Outside of Real Estate.”
Aside from his real estate holdings, it appears that Donald Trump loves junk bonds. These lower-quality bonds carry with them the substantial risk that the person borrowing the money won’t be able to pay it off. His financial disclosure report, which he was required to file since he’s a Presidential candidate, revealed that he has millions, but not billions, in these stocks and bonds. It’s estimated that, outside of his real estate positions, he has about $114 invested in other asset classes.
Trump has boasted that he’s worth $10 billion, although Forbes has said it’s more realistically around $3 billion. Whatever number is closer to the truth doesn’t matter; it’s still a huge sum to have such a comparatively small amount invested in stocks ad bonds. Relatively speaking, it’s just not very much.
As for his overall performance in the market, assuming there are no trades in his portfolio, Steven assesses that as mediocre, coming in a little under 6%. Comparing that to the S&P 500, “he would have lagged pretty dramatically.” But adding in his real estate holdings, he may have matched the return of the stock market.
Steven acknowledges that at Kiplinger there is a preference for stocks over other types of assets because they’ve produced better results over time than any other investment, but volatility does keep some investors away. That’s a valid fear for most people in retirement who should have no more than 50-60% in stocks, according to Kiplinger.
Steven’s investigative efforts into Trump’s holdings also show his fondness for hedge funds, the riskiest kind of junk bonds, with which he has several big positions. These are companies that are near or going through bankruptcy. Having called himself the King of Debt, he’s certainly fishing in familiar waters, which is actually a good thing.
Understandably, for a man who deals in the world of brick and mortar, the intangible aspect of the stock market has less appeal and may even suggest a lukewarm level of interest. He has 45 positions that are worth less than $1,000 and another 35 worth between $1000 and $10,000 and holds these among four brokerage accounts.
What Steven found most surprising was the unnecessarily high fees in his mutual funds. Also, in total, he has 151 positions in stocks, 101 in mutual funds, and 85 individual bonds, spread so widely that no one could keep track of it all.
It seems disorganized, and, quite frankly the portfolio looks like a mess, but not having the inside knowledge of who his brokers are, we can only speculate.
Steve Pomeranz: Hey. Wonder how real estate mogul, Donald Trump, invests his own money when he’s not investing in real estate? Well, Steven Goldberg from Kiplinger is here, and he did a little digging to come up with some surprising answers. Hey, Steven. Welcome to the show.
Steven Goldberg: Glad to be here.
Steve Pomeranz: When it comes to investing outside of real estate Donald Trump takes big risks, but not with stocks, you say. What does he actually do?
Steven Goldberg: He loves junk bonds. I was surprised at how so scatter shot his investments were. They were kind of all over the place, but the thing he emphasizes the most is junk bonds. These are bonds where there’s a real risk that the person who borrows the money won’t be able to pay off.
Steve Pomeranz: Yeah. Junk bonds, basically, are considered lower quality bonds. They’re generally under what’s called investment grade rating. There’s a level of junk bonds, too, from the most speculative where you get the highest rate to the least speculative of this generally speculative area where you get a lower rate. Still higher than you would get on a risk on a guaranteed rate, like say something from the U.S. Treasuries or something from a very high-quality corporation. These are lower-quality bonds, but before we get into that, how did you figure out all this stuff? It’s not like he prints out a statement.
Steven Goldberg: Right, because he’s running for President, he had to file a report. A financial disclosure report, and he’s got millions of dollars rather than billions of dollars in these stocks and bonds. It was just going through that report and putting it into portfolio management software. It was easy enough.
Steve Pomeranz: How much does he have, to your calculation, how much of that money was invested in the junk bonds, the stocks, and everything else outside of his trophy real estate positions?
Steven Goldberg: $114 million.
Steve Pomeranz:$114 million. Okay. If he’s worth … I don’t know.
Steven Goldberg: It says he’s worth $10 billion, although that’s been questioned.
Steve Pomeranz: Yeah. I think Forbes said he’s worth about $3 billion.
Steven Goldberg: Yeah.
Steve Pomeranz: Let’s use that number. I mean, whatever the number is, I don’t really care.
Steven Goldberg: It’s still a lot of money.
Steve Pomeranz: It’s still a lot of money either way, but he’s really got $114 million outside of his $3X billion, whatever it is, invested in stocks and bonds. That’s not very much.
Steven Goldberg: No. Not considering how much he has. I guess that’s just liquidity because that can be converted to cash much more easily than a golf course or another real estate investment.
Steve Pomeranz: Sure. Sure. That’s a very good point. Okay. He invests in stocks. He invests in bonds. The next question is, how has his performance been?
Steven Goldberg: Well, it has been pretty mediocre because we’re assuming no trades in the portfolio. There’s no way we can know what he owned last year. He would have returned 1.2% over the last twelve months ending June 30th and annualized a little under 5%. A little under 6% over three and five years.
Steve Pomeranz: Okay. How does that compare to the S&P 500?
Steven Goldberg: He would have lagged pretty dramatically. He’s got just a little over half the volatility of the stock market.
Steve Pomeranz: Yeah. I was going to say, it’s not really fair to compare his return to the S&P 500 because he doesn’t have all of his money in stocks. He’s got bonds as we said. I know you did a calculation where you looked at a portfolio of benchmarks that would kind of match his allocation.
Steven Goldberg: Yeah. Measurement of that one, it looks like he does about what you’d expect. About what the market returned.
Steve Pomeranz: Okay. Yeah.
Steven Goldberg: Kiplinger, we tend to be stock people. We like people to own stocks.
Steve Pomeranz: Yeah. Why is that?
Steven Goldberg: Just because they’ve produced better returns over time than every other investment.
Steve Pomeranz: Well, why is everybody so scared of them? I mean, how do you guys view the volatility that one has to experience in order to get those higher returns in stocks?
Steven Goldberg: You just answered the question when you asked it. People are scared by the volatility of stocks.
Steve Pomeranz: Should they be?
Steven Goldberg: Well, sure. If you’re going to need your money short term, you need to have some money in bonds, too. I think that for most people in retirement, 50% or 60% in stocks makes sense.
Steve Pomeranz: Now, getting back to Donald Trump, you wrote that he likes hedge funds a lot. Tell us about that.
Steven Goldberg: Yeah. He has several big positions in hedge funds that invest distressed debt, which was the very riskiest kind of junk bonds. You know, Trump calls himself the King of Debt, so he understands junk bonds. He understands distress debt.
Steve Pomeranz: Yeah.
Steven Goldberg: These are companies that are near or going through bankruptcy. In that sense, he’s investing in what he knows.
Steve Pomeranz: Right, which is a good thing. That is one of the keys to successful investing is investing in what you know.
Steven Goldberg: Right, but I think he could get some more diversification from stocks. When his junk bonds are not doing well, probably his own debt is not going to be doing so well either.
Steve Pomeranz: Yeah. Well, it just occurred to me that this whole idea of investing in junk bonds is very much still tied up to his investing in real estate. I have noticed with clients of mine, if they were ardent real estate investors, they never felt comfortable about the stock market. They like bricks and mortar and dirt. They want to go out and see the thing and want to talk to whoever is leasing the properties, the store owner, whatever. I think they feel that stocks are esoteric. They’re really intangible, and they’re just not as comfortable. This seems to follow that same trend of thought. If Donald understands debt, and he’s investing in other peoples debt, and he can look at the numbers just like he looks at his own numbers and understand what the risks and rewards are, yeah I can really understand that he would get involved. Seems to me, based on your article, he’s really just not serious about his stock investments. As a matter of fact, you wrote that he has forty-five positions that are worth less than $1,000 and another thirty-five are worth between $1,000-10,000. I mean, what the heck is that?
Steven Goldberg: Well, what I read is he should clean out his closets. Anything under, with the billions of dollars he’s worth, anything under $1 million in a stock doesn’t really make sense.
Steve Pomeranz: It doesn’t move the needle at all. It’s like he’s not really paying attention.
Steven Goldberg: Yeah. Then, he has four brokerage accounts, which I don’t think makes a lot of sense either. What tends to happen when someone has more than one brokerage account is one broker doesn’t know what the other manager is doing.
Steve Pomeranz: Yeah.
Steven Goldberg: They can end up doubling up on positions and just not doing as good a job.
Steve Pomeranz: Yeah. I think what’s operating here is, I mean I can’t speak for him, but in my own experience he’s handing this money over to them. Either he’s calling them with, you know, he gets a hot idea, he’s got an emotional feeling about something, and he says, “Buy me XYZ,” and they execute the trade for him. It doesn’t look, if he’s got these kinds of positions, that they’re actually systematically investing these with managers or even in mutual funds. Now, he has a fair amount of one big mutual fund, the Ron Baron’s fund, right?
Steven Goldberg: He had a tremendous amount in Ron Baron’s mutual fund, and for some reason he sold almost the whole lot.
Steve Pomeranz: Well, maybe to fund the campaign.
Steven Goldberg: It could be. It could be.
Steve Pomeranz: Well, what you pointed out about the Ron Baron fund is, first of all, he’s a good manager. I don’t know that he’s one of the best managers out there, but that’s a matter of opinion. He’s also buying the mutual funds that are in the retail shares. Meaning he’s paying the highest rate of fees internally, and he surely could get the institutional level Ron Baron fund, which has the lower internal rate. He’s not even doing that.
Steven Goldberg: Yeah. That’s just plain sloppy. I don’t understand that at all. Overall, he has the one hundred fifty-one positions in stocks, one hundred and one positions in mutual funds, and eighty-five individual bonds. It’s just spread really widely. Nobody can keep track of one hundred fifty-one stocks.
Steve Pomeranz: Well, he’s got four brokers to do that.
Steven Goldberg: Yeah.
Steve Pomeranz: Maybe they’re handling forty each or something like that.
Steven Goldberg: Could be.
Steve Pomeranz: Yeah. There just seems to be a sense of huge disorganization. I mean, you and I deal with this stuff every day. We like to know and understand how the positions match with each other. How the different strategies work with each other. These are planned portfolios that you and I are used to dealing with, so when you see something like this … Yeah, we used to call it The Cat’s Breakfast. A person would come in, and it’s just all over the floor. It’s just not organized. It just gives me the sense of the same exact thing. Of course, we’re really just, what are we doing, we’re looking at information, and we’re drawing conclusions. We’ve never actually talked to the guy or the people that actually manage his money. As professionals, this is our best guess.
Hey, listeners, where do you get to hear two guys talking about Donald Trump’s portfolio from the inside out and from the point of view of people that have a lot of experience and can look at this thing objectively?
My guest, Steven Goldberg from Kiplinger.com, discussing his article, “How Donald Trump Invests Outside of Real Estate.” Steven, thank you so much for joining me today.
Steven Goldberg: Thanks for having me.