Vol. 5, No.

24i

Two Wall Street, New York, New York 10005 www.grantspub.com

DECEMBER 14, 1987

Sell Donald Trump

Crash or no crash, the personal stock
of Donald J. Trump, the New York realestate celebrity, is up. Up is Trumps
favorite direction. He proposes to build
the worlds tallest building. For flying,
he owns a Super Puma jet helicopter
and a Boeing 727. For weekend cruising,
its the yacht Nabila, which belonged to
the previously opulent Adnan Khashoggi. On land, he rides in limousines. A
new Trump line of superstretch limo
produced by a Bronx manufacturer was
named forwho else?
Donald Trump, 41 years old, by all
accounts is nearly perfect. He is six
feet-something tall (People) and photogenic. He is the owner of Trump Tower, which, among real-estate people, is
mentioned in the same breath as another one-time family business, Rockefeller Center. Trump himself calls
it, the best piece of real estate in the
world, in the most incredible city in the
world. He has called the Mayor of New
York a moronand lived to tell the
tale. When New York City government
bungled the job of restoring the Wollman ice-skating rink, Trump stepped
in to finish it, on time and within budget. He and his wife Ivana, a former
model and skier and a current socialite
and business-woman, have three children. If one of the children should happen to call the office, that child is put
right throughno questions asked. In
10 years, says Ivana, Donald is going
to be 51 years old. How many casinos
can you own? How many buildings can
you build? Eventually, Donalds going
to look at some other business. Maybe
its politics. Maybe its something else.
I never say never.

Although the mayor and Trump get

on like Iran and Iraq, the developer has
managed to ingratiate himself with national political leaders. He has taken
out full-page advertisements. in The New
York Times (at about $35,000 a page) to
advance his views on foreign policy. He
has flown to Moscow. I like the people,
and the people like me, he says, sounding a little proprietary about the people.
He wont be running for President this
year, though: Its so hard to just drop
everything to do something like that.
Although Trump contends that he
doesnt like doing press, he is chron
ically landing on the cover of magazines.
Business Week, the New York Times Maga-

zine and People have done him. New York

almost canonized him. Trump has done
himself, too, in Trump: The Art of the Deal,
newly published by Random House. I
dont do it for money, Chapter One
leads off. Ive got enough, much more
than Ill ever need. I do it to do it. Deals
are my art form. Elsewhere Trump
contends, The point is that you cant
be too greedy. Also he writes, I like
thinking big. I always have. It is an affecting story of an often misunderstood
business genius. The book has gone to a
25% discount from the $19.95 list price
at Waldenbooks.
He is this years phenomenon,
People said, a 41-year-old member of a

article-GRANTS/DECEMBER 14, 1987 2

species on the verge of extinction: He

is a Tycoon.
It is possible that no individual in
America is more overbought, personally,
than Trump, It is one thing to call Edward Koch a moron and get away with
it, or to patronize your father in your
autobiography (I had loftier dreams
and visions, writes Donald, comparing himself to Fred). It is another to
get your face on the cover of People and
and manage to hold on to
your money. Whom the gods would destroy, they first make merry,: a friend
quipped. Trump was the roaring 1980s
in person. And now that the roaring has
subsided, what will become of him? If
New York City real estate should happen to sink, what will happen to the man
who owns so much of it? Is it possible
that publicity, the scourge of fortunes
and breaker of luck, will be any kinder
to Trump than it was to the investorturned-literary-celebrity, George Soros?
Our curiosity was reduced to a few
basic questions: Is Trump the type of
tycoon with money or the type with
out? Does he personally go in for leverage? To what extent does his net
worth depend on the quoted prices of
illiquid assets? More broadly still: Will
any real-estate fortune be secure in
the coming credit difficulties? Seeking the answers, we read the Trump
oeuvre: press clippings, public financial statements, autobiography, back
issues of W and Suzy columns. We
asked around town. Taking nothing for
granted, we ordered up a Dun & Bradstreet report on the Trump Organization. The results were inconclusive:
EMPLOYEES: 4,200, including offi
cers; 100 employed here.
FACILITIES: Rents 5,000 sq. ft. in
multistory steel building in good condition. Premises neat [i.e., the best piece
of real estate in the world, in the most
incredible city in the world].
LOCATION: Central business district on a main street [i.e., Fifth Avenue].
BRANCHES: Subject operates a casino [he has two and is building a third]
in Atlantic City, N.J.
D&B did not specifically address the
question of whether Trump has any
money or whether it is all spinach. Business Week had ventured $3 billion, seeing
Forbes an estimate of $850 million and
raising it a couple of billion, but the

Business Week estimate appeared before

the crash and before the tycoon took a
controlling position in Resorts International with its vast sinkhole, the unfinished Taj Mahal casino in Atlantic City.
Furthermore, the magazine spoke before the publication of Trump: The Art of
the Deal, and the authors specific guidelines for interpreting Trump, i.e.:
The final key to the way I promote is bravado. I play to peoples fantasies. People may
not always think big themselves, but they
can still get excited by those who do. Thats
why a little hyperbole never hurts. People
want to believe that something is the biggest
and the greatest and the most spectacular.
I call it truthful hyperbole. Its an innocent
form of exaggerationand a very effective
form of promotion.

Maybe he was only exaggerating,

but Trump divulged that $320 million
seemed like a lot of money to him as
recently as 1985. That was the year he
purchased Hiltons Atlantic City hotel,
which, he says, was the biggest bet of his
life. He borrowed the money from Manufacturers Hanover, incidentally got
the president on the phone and got the
money just like that. It goes to show
you the value of credibility. In return, I
did something Id never done before. I
personally guaranteed the loan.
Thats the rub with Trump: not
knowing how many chits he has out.
The tycoon has raised $600 million in

junk-grade debt for his two Atlantic

City casinos: $250 million in Trump
Plaza Funding mortgage bonds (the
127/8s of 1998), $226.8 million in
Trumps Castle Funding first mortgage
bonds (the 133/4s of 1997) and $125 million in another Trumps Castle Funding first mortgage bond issue ( the 7s of
1999). As for Trump himself, our intelligence has it that he is, in fact, loaded.
More than that, our informants say, he
is probably liquid. Hes big time, he
really is, said a real-estate friend who
has an appreciation of liquidity. The
source likens him to Samuel LeFrak,
the New York City developer, though
a notch below Trammell Crow, the national developer. Trump has tended
to work with money partnersthe
Equitable Life Assurance Society, for
instance, or his anonymous junk-bond
buyersrather than on his own credit.
Barring a lurch toward recklessness, our
informant contended, Trump is almost
a shoe-in to die rich.
Resorts International, the casino
and hotel operator, may not reverse
that bullish prognosis, but it does
not enhance it, either. On the face of
thingsan impression corroborated by
the action of Resorts commonthe
company is struggling. Trump paid
$100 million or so for control of the
voting B stock last summer. Since
that purchase, the Resorts story has
been Wollman Rink in reverse, with
massive overruns and snafus at the gi-

article-GRANTS/DECEMBER 14, 1987 3

ant Taj Mahal casino/hotel complex.

A year ago, the cost of the project was
estimated to be $550 million. In the
June 10-Q, it was put at $800 million.
In the brand-new September Q, it
was bumped up to $930 million. The
latest Q discloses plans to issue $100
million of convertible bonds and up
to $450 million of secured indebtedness, all junk grade. That would push
the volume of high-yield issuance by
Trump-controlled companies to over
$1.5 billion, or 1% of the entire public
junk market, an impressive figure even
for a man who has gotten off the line, I
want the best, whatever it takes.
If the money does get raised, the Q
also noted, Resorts would show $1.2
billion of long-term debt. It would
show just $109 million of equity. The
Companys ability to service that
amount of debt will depend, to a significant extent, upon the future profitability of the Taj Mahal, Resorts adds,
which will be no mean feat. Even if you
happen to be the moderately leveraged house, Atlantic City has become
a harder place in which to make a buck.
In the September quarter, city-wide
gaming capacity was up by 12.7%, while

gaming revenues were up by only 9.7%.

Trump Plaza, for instance, managed
to score an 18.7% gain in gaming revenues in the September period thanks
to expanded parking and the opening
of some new super suites. But, as the
financials also disclose, competition
raised gaming costs by almost $8 million, or 32%. The document summed
up the troubles in one neat sentence:
Market capacity has outstripped market growth.
As might be expected, Trump has
not left his flanks entirely unprotected
in this campaign. Resorts and Trumps
very own Trump Hotel Corp. recently
signed a comprehensive services agreement (thank you, Forbes). Among its
other features, the contract guarantees Trump a fee equal to 3% of the
post-July 21 construction costs of the
$930 million (and counting) Taj Mahal. That is, the more it costs, the more
Trump stands to earn. We wanted to
ask Resorts about that, and we wrote
down a question to put to the financial
v.p.: Is there any limitany capto
what the Trump Hotel Corp. could
earn through cost overruns at Taj Ma
hal? If not, doesnt Trump, considering

he paid only $100 million for his stock,

have a vested interest in delay? At the
very least, arent his interests and the
companys sharply at variance?
An arbitrageur who used to own Re
sorts A said that he sold out his stock
on the hunch that Trump was not so
much on the side of Resorts as on the
side of Trump. Some fine print in the
Resorts September Q raises the same
point. It notes that Donald Trump, the
chairman of Resorts, controls two other
Atlantic City casinos in which Resorts
has no interest:
Because the Trump Casinos compete
directly with other Atlantic City casino/ hotels, including Resorts International Casino
Hotel, and will compete with the Taj Mahal. . . potential conflicts of interest may be
deemed to exist by reason of access to information, business opportunities or otherwise.

Never underestimate the man who

overestimates himself, Warren Buffett
is supposed to have said. Sell Trump
shortbut with close stops only.

Grants and Grants Interest Rate Observer are registered trademarks of Grants Financial Publishing, Inc.
PLEASE do not post this on any website, forward it to anyone else, or make copies (print or electronic) for anyone else.
Copyright 1987 Grants Financial Publishing Inc. All rights reserved.

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Vol. 32, No. 22

Two Wall Street, New York, New York 10005 www.grantspub.com

NOVEMBER 14, 2014

Read the footnotes

Vanguard Group Inc., which beats
the mutual fund industry by not trying to beat the stock market, attracted
more money in the first 10 months of
2014 than it did in any calendar year
of its storied 39-year history. Reciprocally, reports Mondays Financial Times,
fewer fund managers are beating the
market this year than at any time in
over a decade, piling further misery on
a profession that faces increasing investor skepticism.
Costs, returns and fads are the topics under discussion. In preview, we
judge that passive equity investing is a
good idea. It is such a very good idea, in
fact, that it has become a fad. We are
accordingly bearish on itbearish in a
cyclical way. We are bearish on passive
bond investing, toobearish in a more
than cyclical way. And we are bullish on
security analysisbullish in an unconditional way.
You cant really argue with the Vanguard value proposition. Markets are
reasonably efficient, and information
is yours for the asking. Active managers, en masse, are not very good at their
jobs. Costs are therefore a critical determinantthe critical determinant,
Vanguard calls themin achieving
investment success. A half-decades
worth of rising asset prices is the evidentiary icing on the cake. Active
management has never been in worse
repute, a man from Morningstar testifies. This is the darkest of days.
Many have helped to dim the lights.
We think of Fred Schwed Jr., progenitor of the efficient markets concept
in his wise and hilarious 1940 book,
Where Are the Customers Yachts?;
Burton G. Malkiel, author of the influential 1973 book, A Random Walk
Down Wall Street; Jack Bogle, who

launched the good ship Vanguard in

an increasingly expert and successful
1975; William F. Sharpe, author of
(or efficient) price discovery market
the 1991 monograph, The Arithmemechanism. Because all have ready
tic of Active Management; and most
access to almost all the same informarecently, Charles D. Ellis whose The
tion, the probabilities continue to rise
Rise and Fall of Performance Investthat any mispricingparticularly for
ing in the July/August issue of the Fithe 300 large-capitalization stocks that
nancial Analysts Journal initiated one of
necessarily dominate major managers
Wall Streets rare bursts of soul searchportfolioswill be quickly discovered
ing (nothings turned up yet).
and arbitraged away to insignificance.
As we all know, Ellis writesbut
The unsurprising result of the global
without always understanding the omicommoditization of insight and infornous long-term consequencesover
mation and of all the competition: The
the past 50 years, increasing numbers
increasing efficiency of modern stock
markets makes it harder to match them
of highly talented young investment
and much harder to beat themparprofessionals have entered the com
ticularly after covering fees and costs.
petition for a faster and more accurate
The hedge fund business makes an
discovery of pricing errors, the key
ironic star witness for Elliss case. In
to achieving the Holy Grail of supeTwo Wall Street, New York, New York 10005 www.grantspub.com
22 ended in 2000, average
NOVEMBER 14, 2014
theNo.
decade
anrior performance. They have more ad- Vol. 32,
nual returns topped 20%, according to
vanced training than their predecesHedge Fund Research via a recent arsors, better analytical tools and faster
ticle in Institutional Investor magazine.
access to more information. Thus, the
In the five years to 2013, those annual
skill and effectiveness of active managreturns had dwindled to an average of
ers as a group have risen continuously
just 7.78%, as tallied by the HFR Fund
for more than half a century, producing
Weighted Composite Index. Individuan increasingly expert and successful
Vanguard
Inc., which 60%
beats
als whoGroup
tritely apportioned
of theirlaunched the good ship Vanguard in
(or efficient) price discovery market
the mutual
industry
by not
try- in a1975; William F. Sharpe, author of
money fund
to stocks
and 40%
to bonds
mechanism. Because all have ready
ing tolow-fee
beat theindex
stockfund
market,
attracted
achieved
an annualthe 1991 monograph, The Arithmeaccess to almost all the same informamore return
moneyofin13.17%
the first
10the
months
of
tic of Active Management; and most
over
same interval.
tion, the probabilities continue to rise
2014 than
in any
calendar year
Theit did
retired
hedge-fund
eminencerecently, Charles D. Ellis whose The
that any mispricingparticularly for
of its Michael
storied 39-year
history.
Steinhardt
cameReciproto the phoneRise and Fall of Performance Investthe
300 large-capitalization stocks that
cally, the
reports
Mondays
Financial
Times,
ing
in
the
July/August
issue
of
the
Fiother day to discuss the reasons
necessarily dominate major managers
fewerhedge
fund funds
managers
beating
theof thenancial Analysts Journal initiated one of
haveare
fallen
so short
market
thismark
yearhethan
at any
timeThe
in fundWall Streets rare bursts of soul searchportfolioswill be quickly discovered
high
helped
to set.
over athat
decade,
piling
further misery
on(it wasing (nothings turned up yet).
and arbitraged away to insignificance.
became
Steinhardt
Partners
a profession
thatSteinhardt,
faces increasing
The unsurprising result of the global
originally
Fine,invesBerkowitz As we all know, Ellis writesbut
tor skepticism.
commoditization of insight and infor& Co.) debuted in 1967. Over the nextwithout always understanding the omimation and of all the competition: The
Costs,
returns
and fads are
the top-annualnous long-term consequencesover
28 years,
it produced
compound
increasing efficiency of modern stock
ics under
discussion.
we profitthe past 50 years, increasing numbers
returns
of 24.5% In
netpreview,
of fees and
markets makes it harder to match them
judge reallocation,
that passive equity
a andof highly talented young investment
i.e., theinvesting
standardis1%
and much harder to beat thempargood idea.
is such a very
good idea, insched-professionals have entered the com20% It
hedge-fund
remuneration
petition for a faster and more accurate
ticularly after covering fees and costs.
fact, that
a fad. We observed,
are
ule. it
Athas
thebecome
start, Steinhardt
discovery of pricing errors, the key
The hedge fund business makes an
accordingly
on itbearish
in Today,
a
Hi, Im rich. Whats your name?
there bearish
were perhaps
10 funds.
to achieving the Holy Grail of supeironic star witness for Elliss case. In
cyclical way. We are bearish on passive
rior performance. They have more adthe decade ended in 2000, average anbond investing, toobearish in a more
vanced training than their predecesnual returns topped 20%, according to
than cyclical way. And we are bullish on
sors, better analytical tools and faster
Hedge Fund Research via a recent arsecurity analysisbullish in an unconaccess to more information. Thus, the
ticle in Institutional Investor magazine.
ditional way.
skill and effectiveness of active managIn the five years to 2013, those annual
You cant really argue with the Vaners as a group have risen continuously
returns had dwindled to an average of
guard value proposition. Markets are
for more than half a century, producing
just 7.78%, as tallied by the HFR Fund
reasonably efficient, and information
Weighted Composite Index. Individuis yours for the asking. Active managals who tritely apportioned 60% of their
ers, en masse, are not very good at their
money to stocks and 40% to bonds in a
jobs. Costs are therefore a critical delow-fee index fund achieved an annual
terminantthe critical determinant,
return of 13.17% over the same interval.
Vanguard calls themin achieving
The retired hedge-fund eminence
investment success. A half-decades
Michael Steinhardt came to the phone
worth of rising asset prices is the evithe other day to discuss the reasons
dentiary icing on the cake. Active
hedge funds have fallen so short of the
management has never been in worse
repute, a man from Morningstar testihigh mark he helped to set. The fund
fies. This is the darkest of days.
that became Steinhardt Partners (it was
Many have helped to dim the lights.
originally Steinhardt, Fine, Berkowitz
We think of Fred Schwed Jr., progeni& Co.) debuted in 1967. Over the next
tor of the efficient markets concept
28 years, it produced compound annual
in his wise and hilarious 1940 book,
returns of 24.5% net of fees and profit
Where Are the Customers Yachts?;
reallocation, i.e., the standard 1% and
Burton G. Malkiel, author of the in20% hedge-fund remuneration schedfluential 1973 book, A Random Walk
ule. At the start, Steinhardt observed,
Hi, Im rich. Whats your name?
there were perhaps 10 funds. Today,
Down Wall Street; Jack Bogle, who

Read the footnotes

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