On the face of it, Donald Trump seems crazy. Exhibit A is the gleaming, terrifying self-confidence. Exhibit B, the narcissistic multi-decade binge on self-named towers. And, finally, Exhibit C: the reckless public comments, regarding everything from rapist immigrants to bleeding women, which, primarily, seem designed to render him unelectable – odd behaviour in a primary campaign.
Trump’s Teflon polling numbers suggest there may be some method to his madness, but most commentators see these numbers as reflecting his entertainment value more than most people’s voting intentions. Trump has surely at this point irreparably offended enough major groups of voters (Hispanics, women) that he can’t win the presidency.
Which raises the question: just how did someone so reckless get to be so successful, and – to be specific – so rich, in the first place?
In his early years, Trump’s great advantage was, believe it or not, his political savvy. It’s widely known that Donald Trump’s father bequeathed to his son a $40 million real estate business. Less well known, but equally crucial, were the political connections.
Trump’s father was a player in Brooklyn’s Democratic Party political machine, and Trump started out in business by appointing top New York political operators to play leading roles in his Trump Organization, including Louise M. Sunshine, the campaign finance director for former New York Governor Hugh L. Carey.
Shortly thereafter, this savvy paid off, as Trump managed to obtain some extraordinary support from New York City officials. Trump was straightforward about his unique advantages in this area: describing a deal that gave him a 40 year tax abatement on the construction of a luxury hotel near Grand Central station, he said: “In another year, I wouldn’t have gotten the abatement and no one ever will again.”
Indeed, at the time there was no legal mechanism for the city of New York to support individual real estate developers in such a fashion, so Trump negotiated a scheme whereby the government legally owned the building and gave him a 99-year lease. (Trump himself likes to highlight his dealmaking prowess as the secret to his success – but without similar connections, most of us won’t be cutting similar deals with the city of New York anytime soon.)
Lest I seem critical, I should point out that great business people always need some sort of unique advantage to rise above the competition, and the tax abatement was crucial for Trump to secure his financing. Furthermore, in real estate, local political connections are almost inevitably important. Where space is scarce (as in Manhattan) getting the prime spots requires leverage.
Moreover, from that point forward, Trump’s moneymaking came largely from sources other than politics. Essentially, he bet big on New York. This was, in fact, a rather reckless maneuver. But – as with Trump’s current poll numbers – the recklessness paid off.
Trump’s father had begun to do what they tell you to do in business school: diversify, by building a portfolio of properties across the United States. Trump, by contrast, at first built his luxury towers and hotels almost exclusively in New York. This was a big risk – the city had known some long housing slumps, including the slump when Trump started his career.
But his big bet paid off handsomely: Manhattan land values, in aggregate, increased by an estimated compound growth rate of roughly 12% per year, in inflation-adjusted terms, between 1970 and today.
Going from Trump’s inheritance of $40 million in 1975 to his estimated net worth of $4 billion today implies a fairly similar (indeed slightly lower) real rate of return. That’s no coincidence. New York’s success was Trump’s success. (Had Trump bet big on Detroit, his life story would have been rather different.)
There were, of course, numerous side ventures, in casinos and golf courses, as Trump’s fortune grew. That said, several of these ventures (especially in casinos) led to bankruptcies, and the fact that Trump’s net worth has slightly lagged Manhattan real estate inflation – and aggregate real estate values at that – suggest that these initiatives haven’t succeeded in enhancing his wealth all that much.
Thus when Trump lectures his readers in his best-selling The Art of the Deal – “You don’t necessarily need the best location. What you need is the best deal” – he’s not entirely on the mark. The New York location, and his starting $40 million, did most of the work. Indeed, he could have bought random pieces of Manhattan real estate and made just about as much.
In recent years, however, Trump has become more focused on the power of branding. Building brand value is a far safer proposition than putting most of one’s eggs in one real estate basket, from the perspective of financial risk.
Indeed, to his credit, Trump was one of the first real estate developers to appreciate the relevance of branding to the industry. The Trump name seemed to convince buyers that prices of their property would rise spectacularly (probably because prices had indeed done so at Trump’s high-profile New York buildings).
Trump began to license his name to other developers, including projects in Florida and in Korea where he had no involvement other than branding. He also began to focus on brand-building exercises, such as his TV show, the Apprentice.
Today, Trump is so focused on the value of his brand that he tends to add it to calculations of his net worth – which is understandable if not entirely accurate from an accounting perspective – resulting in some disputes over just how many billions he has.
That said, Trump’s focus on his brand is by no means foolish. Brands are a sustainable barrier to competition and thus can be a source of reliable long-term profits – indeed, sometimes, world-beating profits: the current list of the world’s billionaires includes some luxury-brand fortunes, such as L’Oreal and LVMH, among the top 20 largest personal fortunes in the world.
And Trump’s run for the US presidency has taken the Trump brand to a whole new level. It is hard to imagine a quicker or more effective way to achieve global exposure. The first Republican primary debate attracted 24 million viewers, and a maelstrom of commentary, not only in the US but also abroad. One presumes that China’s new megacities will be sprouting Trump Towers in short order (once they’ve sorted out the country’s current real estate crash).
In short, by enhancing the value of the Trump brand, this presidential run may catapult Trump into the top ranks of the world’s billionaires, while at the same time considerably reducing the financial risks he runs.
Trump may well be crazy – but, quite possibly, crazy like a fox.
