I continue to be mystified by this take. The S&P 500 index is usually the benchmark cited here. But the S&P 500 is tremendously diversified over sectors, factors, you name it. Trump managed to create actual wealth in our economic system at a rate slightly less than the S&P 500. If anything the people who invest in index funds are freeloaders on the economic engine that Trump is part of (full disclosure: I use index funds without exception for my investments)
Another thing bothers me: you're supposed to look at risk/return, not simply return, in evaluating investment strategy.
If anything the people who invest in index funds are freeloaders
No. How much wealth could those individuals create if they couldn't sell the companies on the market and invest that money, and had instead to accumulate dividends? The relationship is symbiotic.
Yes, Trump created wealth, but the point is that his peers would have created even more if he hadn't used that money himself. To make an analogy, I can swim a few laps, but you wouldn't want to have me replace Michael Phelps on your team.
Trump has created wealth, but he also destroyed wealth in his multiple bankruptcies and the contractors he stiffed. One could argue that casinos (even if they are profitable) are a net destructor of wealth. It is very hard to get a clear picture of exactly how much net wealth he created since there is no reliable information. Tax returns would have been a good start...
His father, Fred Trump, built a real estate empire of 27.000 apartments in Brooklyn and Queens. Just sitting on those and maintaining and expanding it would have resulted in a fortune many times bigger than he has today.
I may have been a bit hyperbolic about freeloaders.
The bigger point I want to make is that the standard deviation on returns of a single venture like Trump's is so large that you cannot meaningfully compare it to a highly-diversified basket of stocks.
To use your analogy, it'd be like evaluating the effectiveness of a coach in a swimming event by picking a single one of their swimmers and comparing them to the average times of the U.S. Olympic team. Does this necessarily imply anything at all about the skill of the coach?
I feel like you're making an argument against your thesis instead of for it (?). With higher risk, you expect higher return... so isn't that another tick against Trump's "success"? His ventures were way riskier than an index fund (see bankruptcies and losses), yet they had a markedly lower return. That means they were not good investments.
Well there are two possibilities: 1) Trump's businesses are lower risk and so the lower realized return is as expected 2) there is significant idiosyncratic risk in a single company which can diversified away with the S&P500 while maintaining the same expected return.
I disbelieve (1) because of his multiple high-profile bankruptcies.
In running his businesses, he also delegated "actual wealth creation" to others. E.g. the waiter serving drinks is the one creating wealth as much or more so than the owner of the business...
No, it really does not. The S&P 500 inclusion criteria[1] states:
> Treatment of IPOs. Initial public offerings should be seasoned for six to 12 months before being
considered for addition to an index.
So if the S&P 500 explicitly excludes equities to IPO into the index, then how is it that an investor in an S&P 500 index is delegating wealth creation? They're just trading the returns with other investors. And to be clear, this is totally great for the investor! But it shouldn't be confused with actual business.
You can't ignore the indirect influence. The same way people care about resale value of their car or house, the investors that purchase at an IPO know that index funds will buy their shares and can therefore make more and bolder investments.
Of course I can ignore the indirect influence; if the company had no actual value at IPO its share price would plummet. Also, by definition the S&P 500 only includes companies which have had 4 consecutive quarters of positive GAAP earnings, so the shares would have value on the public markets. Specifically, they'd have to have enough value to be among the 500-or-so largest positive-earnings companies by market capitalization. Hardly value that can be attributable to indirect influence of an index fund.
You're looking at it too statically, and ignoring the full ecosystem.
If I'm an investor that buys at IPO time, how many companies am I willing and able to invest in if I have to wait for the profits to come in through yearly dividends? And so, if I'm a VC, how many companies am I willing and able to invest in if the IPO market is much smaller? And so, if I'm an entrepreneur, how many companies can I found and create value from if I have very little chance of selling them off?
The index funds are the terrain that sustain the "wealth creators".
Billionaires that received millions in loans from their daddy? Not so much.
Great respect to all who went out and built something great. Trump is not one of them; he would be penniless if his dad hadn't rushed in and saved him on at least two separate occasions.
/s