moneyFYI
Financial Freedom Is Merely Organized Common Sense
Questioning Forbes Editorial Efforts
“How To Beat Donald Trump At Making Money” is a “catchy title on an article in Forbes in early August. Contributor Erik Carter thinks Trump could have done better in the S&P500
Erik claims that following his method, Trump should not have $8.7 billion but rather $20 billion. He makes 5 points around the question of how to do it and none are beyond the reach of average investors. Save of course the starting with $200 million part.
He recommends
- Start with some savings
- Take some risk
- Diversify
- Keep costs low
- Be patient
It is difficult to argue with those ideas.
It is very easy, however, to argue with the idea that you can turn $200 million in $20 billion by investing in the S&P500 from 1982 to now. 32 years and 7 months ending 31 July 2015.
Eric claims that index, with dividends reinvested presumably, returned 11.86% for that period, more or less correct. I got 11.28% here.
He could have used a different start point I suppose, but the .58% is not the quibble. Here is the quibble:
- 11.86% for 32.6 years turns $200 million into $7.7 billion not $20 billion.
- 1982 is a particularly beneficial start point for the S&P500. Starting anything with a rare start value is misleading.
- 11.86% ignores taxes and they are significant even at 10%
- 11.86% assumes no money has ever been withdrawn. As you may have noticed, “The Donald” has a costly lifestyle and a couple of divorces in that period.
If taxes averaged 10% throughout the period, the $7.7 billion becomes $5.4 billion.
If lifestyle is 10% of income, very low for Mr. Trump, the after tax $5.4 billion becomes $3.8 billion less divorce settlements.. Still rather nice, but a long way from $20 billion.
In a more pedestrian world, someone with $200,000 at the very beneficial end of 1982, with taxes at 10% of income and exactly zero withdrawals, will have now about $5.4 million. Starting at the end of 1986, less beneficial, would yield about $3 million.
The article really points out several things. None of which relate to beating Donald Trump.
- Erik Carter’s five points are valid and people should consider them.
- Authors and proof readers and editors prefer drama over accuracy. Getting the wrong answer using simple arithmetic and a clear set of numbers is very weak. Ignoring the December 1982 end point bias, taxes, and cost of living is just wrong. It is like hockey. A coach can forgive physical errors. Not so much the mental errors.
- People generally are not fluent with numbers and are very easily impressed with large numbers and the effects of compound interest. The error in the story is evident if you know how to think about it. 11.86% is around 12%. 12% doubles every 6 years (Rule of 72) There are about 33 years, so there should be about 5.5 doubles. Five doubles is 32 times the starting amount and six doubles is 64 times so somewhere around $9 billion. Never $20 billion.
What can we learn?
- Financial literacy is not common
- Be skeptical of articles with numbers that are dramatic,
- Entrepreneurial skills are rare and valuable
- Entrepreneurial investment includes far more than money. Money is actually one of the easier inputs to acquire
- You cannot reasonably expect to achieve massive changes in your net worth with passive investments. Entrepreneurs are anything but passive.
- Taxes have a profound effect on long accumulations
The world is fair. If it looks too good to be true, it is false. That alone should have twigged you to the insanity of the conclusion presented in the title of this story.
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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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