What to learn about finance from Donald trump?

First of all I am not supporter of Donald Trump. I don’t like him. The way he behaved and what he talk is all disgusting. So many people are criticizing him, going against him. And I am completely aware about so many of his lies and nonsense and funny statements. 

But there was one Business mogul in him. One notso successful Business person. Someone who was ready to take risk. So what to understand and learn? And is there anything to learn from him?

First of all there are different things as personal finance and corporate finance and Public finance. But some rules are basic. I am trying to talk about some of them I am not expert finance. Before Taking any financial decisions, Pls contact with your financial advisor.

Donald Trump. 45th President of the United States of America. Well known TV star. Son of one another business man. Father of Ivanka Trump. Husband of Three ladies….

and Real estate business owner. Yes there were six Bankruptcies. But even after Mr Trump is in business. His statement in US Presidential Debate received attention that “Not paying Taxes make me Smart.”  Even though there are many successful Business leaders like Jeff bezzos, Mark Zuckerberg, Warren Buffett, Bill Gets, Steve Jobs what is the thing which makes Mr Trump so special?

  1. Most of other billionaire which I mentioned above are related with Internet. But Donald trump is doing that old fashion Real estate business. Non of them are television star. Jeff is owner of Washington Post. Mark Zuckerberg owns Facebook. But they are not stars.
  2. Most of them are Entrepreneurs. Not Donald Trump. His father was also businessman. Yes. Father of Warren Buffett was also in business of stock trading. But he is not in trading business.

So what is that? Let’s check.

  • Donald Trump is a student of Wharton School of Finance. By taking professional Education, he learned many bits and parts of the business. Warren Buffett also learn from Some great teachers. Benjamin Graham.
  • At age of 25, He entered into business of real estate. You can ask me what is so special in it? It is that business where so many industries are involved. Banking, Human sources, Employment, Cement, Steel even Municipal corporations and sometimes state governments also. All because of it it is that type of business which make one of the largest effect on any economy. But that is not all. Mr trump that time was doing it in Cold war. 70s. It was that time when govt is reducing its influence in economy. Taxes that time are going low. US is developing itself and showing its strength. Perfect time to develop such business.
  • After joining his family business, Elizabeth Trump and sons, He convinced his father to be more Liberal by Taking loan on Equity holding of trump apartments complex. What is that? Say One builder is constructing one building and Give it on rent. He is still owner. So theoretical he holds more than 50% ownership in that building. That is his asset. Now as he is holding some asset, Bank can give him loan against that asset. He can use that money to buy land or in any other way. But as building and construction business is capital intensive in buying land which is locked. It needs big part of capital with respect to other costs in that business. It teaches us the use of Leverage. Very sensitive factor. But if used wisely, it is good.
  • Taking opportunities. In 1971, he changed his attention to Manhattan. Just check the Map and you can understand why Manhattan was important. Red part is Manhattan. There was increasing crime rate, Unemployment due to industrial restructuring. But at the same time Financials industry was booming. Low cost of real estate, easy availability of Workforce. And you are working in one of the important place. Very close to New York. Project was successful. What to learn? You don’t  need too many success. Just keep your failure rate low. One simple success Can help you. Sad that he himself forget it.
  • Biggest lesson that time was keep your business as dumb as possible. Dumb here means do what you are doing. Mr trump changed his business. In some he found success. In some he fail. Warren Buffett and Peter Lynch. Love the businesses which are doing dumb business. Hardly any change.
  • There are some events which really holds potential to create history. 2008 Crisis which is one out of it. If the business knows how to benefit from it then it can prove game changer in company. Today we called them Lehman moment. During Trump’s early days it was Penn Central Bankruptcy. Though the reason for it is also subject for another post but in short, it was a company which died even after holding big amounts of assets. Trump takes advantage of it and was trying to build Houses. Which Proves imposible due to some reason. Due to some other reason, municipal corporation choose to build City convention center on that land. He also bought hotel Commodore, all due to its location. Which teach us one more thing. Always check Fundamentals.
  • Imposible to finish talk about Trump if you forget Grand Hyatt. Around 1974, Hyatt hotels group is growing but don’t have large downtown hotel. Mr Trump realized it as opportunity and make partnership agreement, complex which gives him first Tax deduction. Though it looks like it is tax lose but Hotel business is perfect example of Corporate finance. Generally it is saying when one books Room in hotel, he is paying 1/1000 value of total hotel. Though it is looking like loss, but it is not. Building hotel in Area like Manhattan with partnership of Hyatt group. Teach us one more concept. Inflation. In simple words it can explain as Net present value. Frontload of Investment can generate small cash flow.
  • His failure or Bankruptcy also teach us many things. His airlines business was one out of six. No shocking. Even Warren Buffett also holds negative views on Airlines. The reason is same. As like Real estate, Aviation is also Capital intensive business. Big part of capital is locked in buying Planes and their fuel and Expenditure on crue. Income is totally dependent upon restrictions if any. Trump Tower, Trump Travel, Trump Casino, Trump mortgage, Vodka, Trump Entertainment resourt. All bankruptcy. How that can affect one? . Here we learn opportunity cost. In simple words. When you choose one option over another, you are ignoring and losing one opportunity. If your choice went well. Well done. But not always. There are some factors which are out of your hand. You simply can’t handle everything. So how to decide weather it is successful or failed. If you earn more return then something else. That something else is called benchmark. It can be return on Govt debt, treasury bill or just simply Equity index. If you are earning more than benchmark, you are successful. Trump here definitely loose big in business other than Real Estate. But if you reverse the effect of Tax, which he never paid,  he is looking bigger  looser.
  • Debt is like Alcohol. In small amount, it will not harm you. But if you decide to live on alcohol,  then it looks difficult. In 1990. Even though Mr trump claims his net worth  as $1.5 billion. As per some research conducted by Forbes Magazine, it is only $0.5 billion. Reason is debt. Why? When you are taking debt you are receiving that against something. So when you have debt say $100 and assets $150 then your Networth is not 150 but 50. If you paid that debt with selling assets what will remain with you is your Net worth. Simple. But when you have debt, whatever you are earning is at risk. If you are businessman, earning can fluctuate. But bank or your lender can not listen. If you don’t pay them their interest and capital, they can shut your business.
  • Biggest lesson from Mr trump is Even diversification can fail. Nothing is risk free. Even govt can fail but as there is possibility of Printing money it  happening.
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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter