Michael Sonnenfeldt is the founder of TIGER 21, a community of entrepreneurs and HNW investors who collectively represent $150 billion of net worth. In this episode, they discuss the challenges around the skills of being a successful entrepreneur don’t translate to being a good investor, how to think about legacy planning, and the role alternative investments play in your portfolio.
Connect with Michael Sonnenfeldt on LinkedIn https://www.linkedin.com/in/michael-sonnenfeldt-84072225/
Connect with Ben Fraser on LinkedIn https://www.linkedin.com/in/benwfraser/
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Introduction and Guest Introduction
Ben Fraser: Hello, future billionaires. Welcome back to an episode of the Invest Like a Billionaire podcast. Got a very special episode for you today.
About Tiger 21 and its Founder
Ben Fraser: This is why I was very excited to record our guest today, Michael Sonnenfeldt, who is the founder of Tiger 21. Which is an organization I’ve been following for many years and have referenced their data a lot on this podcast.
So Michael started this group really with just some friends to try to improve their investing and just get around other peers. And so it’s now grown to a think over. 1, 200 members all across the world and combined at about $150 billion of combined net worth across their members. So it’s really ultra high net worth families.
Investment Strategies and Legacy Planning
Ben Fraser: They’re talking a lot about investing, legacy planning. And so in this episode, Michael really talks about his book that he wrote called Think Bigger. I definitely encourage you to read it. I read it as a part of the prep for this interview and he talks about why entrepreneurs actually have a hard time transitioning once they sell their businesses or have a liquidity event and become investors.
Because the skills that make you a good entrepreneur don’t necessarily make you a good investor. He explains why and how you get out of that. We talk about legacy planning. We also talk about alternative investments and the role that they play in a portfolio. Because one of the things that I reference all the time in their data is their members on average have about 50% plus allocations into private alternatives like real estate, like private equity and hedge funds.
Definitely encourage you to check this out. It’s a really good interview. Michael has a wealth of wisdom. So many nuggets that I pulled out of this. Very excited to share this with our listeners.
Promotion of the Podcast and Guest
Ben Fraser: And again, if you are enjoying the podcast, please do share with a friend, subscribe, leave a review, all those things help us continue to grow the podcast, which helps us continue to get bigger guests like Michael to provide amazing insights for our listeners.
So thank you so much for listening. Please enjoy this episode with Michael Sonnenfeldt. This is the invest like a billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you’ll learn from this podcast will make you a better investor and help you build legacy wealth.
Join us as we dive into the world of alternative investments, uncover strategies of the ultra wealthy, discuss economics, and interview successful investors.
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Interview with Michael Sonnenfeldt Begins
Ben Fraser: I am your host, Ben Frazier, and today we’re joined by our special guest, Michael Sonnenfeldt.
And very excited to have Michael on the show. He is the founder of Tiger 21 which is a group that I’ve referenced many times on the show. And he’ll share a little bit about what they do. But Michael, thanks so much for coming on the show. I’m really excited to dig into your story and share some of your insights.
Michael Sonnenfeldt: Thanks. Great to be here with you.
Ben Fraser: Yeah.
Michael’s Backstory and Introduction to Tiger 21
Ben Fraser: So talk a little bit about your backstory. Maybe for those that aren’t familiar with Tiger 21 or what you’re doing and just got to give the shout out early on. You were very kind. Someone from your team sent your book that you wrote called Think Bigger.
Just 39 winning strategies for successful entrepreneurs and had a chance to thumb through it and really enjoyed a lot of things here. So I’m excited to dive in, but give a little background for those that may or not be familiar with you.
Michael Sonnenfeldt: Let me talk about Tiger first, if I may.
The Growth and Impact of Tiger 21
Michael Sonnenfeldt: Tiger is about to celebrate its 25th anniversary. Hard to believe. But we started 25 years ago when I had sold my second business. I was 42 years and 43 years old. And when I was 30, 30 or 31, I sold my first business. I’d been a large real estate developer. And now I found myself selling my second business and I was 43, it was also a large real estate sort of merchant bank.
And the difference was the first time I sold, I’d probably never heard of a concept called wealth preservation. It wasn’t relevant to me at 30 or 31. It felt like I’d been so successful that success would be assured. Of course it never is. And I learned that quickly. But the second time I sold a business was when I was 43 and I wanted to learn from other people, how smart people invest wisely and don’t risk as much of the principle as I had risked after my first sale. Frankly, I didn’t think a lot about risk, I just assumed that.
I would keep being successful and anybody who assumes that rarely is. So I wanted to put together an organization of people like me, who had been really successful entrepreneurs, but now we’re thinking about wealth preservation, legacy, children, the issues that you spend a little more time on after you’ve had a successful exit, because many people, when they’ve been building their business have had.
You’re nose to the grindstone for five or ten or twenty or thirty years and all of a sudden you sell the business and you look up, Groundhog Day, you look around and you say, wow, I had no idea all the things that I hadn’t had a chance to think about. Tiger started twenty five years ago with six Guys who had recently sold their business and got together every month to talk about best practices and what were the opportunities they were seeing.
Initially, we focused a lot just on business opportunities, but over time we found out that investors sign up and people show up. And people are concerned about their children and about their own legacy and sometimes they want to figure out what it means to be a good citizen or brother or sister, child, parent, whatever.
And so, increasingly we became a little more concerned about the whole life of people who’ve been incredibly successful. Jump into after a liquidity event, but I think today, here we are 25 years later as the premier investment network around the globe, we have 1300 members, each of whom joins a monthly meeting somewhere on the globe.
We have 104 groups of 12 to 15 people who meet. Mostly in person in 46 cities around the globe. We have a global group as well that meets in person only a couple times a year. So for people who are on the go or live in a remote location, they might not want to meet monthly in person, but they do so by Zoom.
And our members manage about $150 billion. So by any stretch, the best way to think about it is, although our members on average manage between 20 million and a billion dollars of personal net worth, um, the average is a little over a hundred million in order to get to the $150 billion. And that means that our members are one in 10,000 by accomplishment.
A good way to think about it is. If you’re a major league baseball, football, or basketball player, you’re about 1 in 17, 000 by accomplishment. But if you take the all stars out, that’d be like taking the wealthiest 5, 000 people out. The billionaires. What you’re left with is the major league without the all stars.
That’s about 1 in 10, 000 whether you’re talking about Tiger or actually the majors. So that’s probably a good way to Give you a quick snapshot. Yeah.
Thank you for that. And, you guys publish a quarterly report, which I have loved reading, right? As someone who’s come on the earlier end of my wealth building, and I know a lot of our listeners, it’s really helpful because you have a really great sample of data, right?
$150billion of total net worth is pretty meaningful and to see the breakdown of how your members aggregately are investing their portfolios. And invest in those portfolios over time because it’s, and you’re changing it in a real time quarter. It’s so valuable and the whole theme of this show is to invest like a billionaire.
There’s a lot of billionaires in your group and there’s so much that we can learn, from, just from each other and from what people that are, have attained those levels of success and what they’ve done. And what I’d like to do in this interview, your book is awesome because it’s really focused for entrepreneurs.
It goes through five different stages. The first few are to know yourself, self assessment, building the team, scaling, and growing. And so we have a lot of folks that listen to this podcast that are entrepreneurs that are in that mode of growth. But I really want to focus more on what happens after the liquidity event, right?
Because I think that’s a lot of insights we can pull from. So I’m telling her, go get the book, read it, it’s awesome. He breaks it into these 39 lessons that are short, just power packed lessons. But one of the things that you talked about, so in, in your stage three, I think it’s risk management is the focus and you talk about the idea of I think it’s portfolio defense, right?
Which is a really interesting estimate, some great stories in there, but it’s a talk about that a little bit of how you guys do that in the group and what that means and why that’s valuable.
Sure. So you have to imagine a scene. Of a monthly Tiger 21 meeting with 12 to 15 incredibly successful entrepreneurs, most of whom have had a liquidity event.
And each month, one of the members does what’s called a portfolio defense. Of course, everyone in the room has signed confidentiality agreements. We’ve done background checks. We have a sense of who the people are. And the member has an opportunity that they literally don’t have anywhere else in the world to say.
Let me show you my balance sheet and my income statement. Let me show you or write for you a reflection of my thoughts about how I’m thinking about my investing and tell me if I have any blind spots or if you, if anything occurs to you that just doesn’t seem all that smart. And when you get 12 people, who each are at various points in that same journey.
We have a deep commitment to a learning process that comes from peer to peer learning. We like experts. We like expertise, but we want to keep the experts on tap, not on top. And what we mean by that is that a lot of our members use financial advisors, wealth advisors, brokers use whatever term you want.
And there are many fabulously wise, smart people. But there’s a different quality of experience when you’re actually asking people who have similar success, how they grappled with an issue of diversity, or a second home, or what do you do with your children, or how is your estate set up, or how much cash do you have.
And so we’re part of a large movement of lifelong learners who believe that. There’s lots of wisdom to be gained from consultants and brokers and advisors, but there’s really unique insights that can be gained from peers who are struggling with and succeeding at similar challenges that you might be facing.
Ben Fraser: Yeah. And there’s no real financial incentive that they have, right? It’s purely from a curiosity or a learning or let’s simply.
Michael Sonnenfeldt: Not curiosity. Everybody is there to learn from one another and to offer advice that they wouldn’t get anywhere else.
The Importance of Diversification in Investments
Ben Fraser: Yeah. One of the, one of the stories in there was funny where one of the members I think was presenting and he had a 75% allocation into one fund and, Hey, the performance of this fight has been great.
But 75% is a pretty heavy allocation, right? You probably need some diversification and I don’t know if you want to tell the rest of the story there.
Michael Sonnenfeldt: Sure. It was a moment in time because that member not only had mentioned that they had 75% of their net worth tied up, but actually their other family members had even a higher percentage.
And. They said this guy has been around for 20 years. I’ve been investing in Bernie Madoff. We know him personally and there’s nothing like it. And we even have people in our family who have mortgaged their apartments so they could earn more from Madoff. Then they could earn, then the cost of the interest on the mortgage and it happened at that time, obviously, I’m going back about 15 years.
It happened at that time that I was running what’s called a fund of funds. That’s where you invest in a fund, but in turn, that fund only invests in other funds. And so by investing in the one fund of funds, you get the benefit of exposure to 10 or 20 or 30. Other funds, and it happened in the fund that I was running, one of the investments was made off, but we had an absolute rule that we’d have 14 or 15 funds and each investment would be no more than seven or seven and a half percent of the total.
So while we thought made off was doing very well, and some of our investors were saying, why don’t you have more than made off based on the returns? As I said, Because our discipline is not to put more than seven or seven and a half percent in a single fund. And I was the only person in the room that actually knew Madoff, but the other members said, We don’t care how much money you have or what his returns are.
You can’t put 75% of your assets into a single fund where you could lose it all for reasons that we can’t even figure out. We don’t know anything about this guy. It doesn’t matter what it is. It, you’re throwing a pair of dice that are stacked against you and this member said, thank you very much.
You all really don’t know what you’re talking about. I know this guy. My family knows him and we’ve had the most extraordinary returns for 10 or 20 years. I don’t think I have anything to learn from you. I’m leaving Tiger 21. So not only did this guy have 75% of his assets in Tiger 21. But he thought that he had so little to learn that he left, and I don’t think it was more than a couple months after that, it might have actually been a month or two after that, that Madoff imploded, and it was just a classic example about, I wouldn’t say so much risk and greed, but about thoughtful diversification and trying to ensure for good.
That your legacy is not that you wasted the assets that you spent a lifetime creating, but that you managed them smartly for yourself and your children.
The Difference Between Entrepreneurial and Investment Skills
Ben Fraser: Yeah, that’s definitely a plug and hit story, because we could all get caught in those traps, right? And one of the other points you made is so interesting, because it hits you right in the face, but when you break it down, it actually makes a lot of sense.
And you said, entrepreneurial skills could actually limit your investing success, right? And so these individuals that have incredible talent, incredible grit, the ability to build businesses, create value, and what you said earlier on, take inordinate risks to have that upside and the potential to, to win that same approach doesn’t work as well when you actually investing and trying shifting to a wealth preservation mode we’ll talk about that in a little bit of where those skills scratch people you know in a bad spot.
Michael Sonnenfeldt: So the nature of what it takes to be a great entrepreneur and what it takes to be a competent investor turn out to be incredibly different if you’re neither an entrepreneur. Nor an investor. If you’re a guy walking or gal walking down the street and whatever your job is and you look across the street and say, Oh, there’s an investor or there’s an entrepreneur, many people would say, Aren’t they just the same?
But it turns out that the skills and very nature of people who are entrepreneurs tend to be ideal people. They tend to have creative ideas, they tend to get emotionally attached to the best of their ideas, they because if they’re really good entrepreneurs, they know every single thing that’s knowable about this little business that they’ve created, so they’re in a unique position to assess risk, and they tend to want to milk everything they can out of a single opportunity, maybe.
Because the opportunity is so large if it’s successfully deployed and worked on that there’s no other opportunity to create the kind of returns. If you’re a member of Tiger 21 and you’ve been building a business for 5 or 10 or 20 years, you’ve almost certainly had much higher returns. than Warren Buffett ever earned.
But the difference is that you only had them for 5 or 10 or 15 years. And Warren Buffett has had them for 70 years. And the cumulative impact of 70 years dwarfs. So if you have an 18% return as Warren Buffett had for 70 years, I forget how many millions of dollars. Each dollar became, it’s a lot easier.
It’s hard to believe it’s a lot easier to earn 25% returns for two or three or four years than it is 18% returns for 70 years. And the point is that when you sell. One of the things that’s happened is the world has just told you what a genius you are. You just sold a business and you made a lot of money on it.
And so everything about being a successful entrepreneur lines you on average to the limitations that you have as an investor. If you’re the world’s largest paper clip manufacturer, more about paper clips than anybody else. And a little bit about metal and a little bit about imports and.
Distribution. But if you sell that paperclip business, on average, you don’t know much more or you don’t know more than the best investors who’ve been investing for 10 years. But because the experience has so validated your ego, most entrepreneurs, because they’re human, don’t have a realistic view about the difference between how much they know about the specific business they’ve just exited.
And how little they know about the worldwide, the world of investing, the wide world of investing. And so you not only come to be an investor with the wrong understanding of concentration cause you were fully concentrated in one investment and now you have to learn how to diversify. You probably don’t have a very good idea about assessing risk because you’ve not been assessing securities or small investments.
You’ve just looked at a single business and looked at the risk. You’re completely emotionally tied up in your business every day. If you’re a great entrepreneur for many entrepreneurs, looking at an investment portfolio feels like watching the paint dry. The timeframe is completely different.
And so you have a series of. Things that predispose great entrepreneurs to be poor investors.
The Transition from Entrepreneur to Investor
Michael Sonnenfeldt: And by the way, just because you’re a great investor doesn’t mean you would know how to start a business and talk to customers and motivate employees and assess risks. They really are quite different and if I think there’s any one thing that we’ve mastered over 25 years, it’s beginning to tease out.
The difference between the extraordinary competence in certain areas of entrepreneurs and what it takes to be even a mediocre to good investor, which are just two horses of two different colors.
Ben Fraser: Yeah, that’s so interesting and you talk about having so much success and create overconfidence and then you don’t really have the baseline skill set.
And another thing that makes me think of, I’ve heard the phrase, wealth is created by concentration, but it’s preserved through diversification, right? Those are two totally different concepts. To attain the wealth to build and to sell a business takes a massive effort of concentration and you know this niche better than anybody else and you can see the opportunities that other people can’t see because of your perspective.
But then to apply that same approach to investing it takes a different skill set.
Michael Sonnenfeldt: Yeah. The other, just the other thing is there’s something called survivorship bias. And what that means is that if you’re a successful entrepreneur, you’d like to think that your success is the result of the specific genius that you have, or the good luck that you have.
Remember, if you’re a tiger member, you’re only one in 10, 000. And I can assure you that in those other 9, 999 people who are not as successful as you, many of them had ideas that were just as good as the ideas that you had. And being a successful entrepreneur requires a little bit of humility.
about understanding that luck plays a role. It doesn’t mean that just anybody got successful. Luck tends to favor those who are prepared and ready to take the risk. But even for every ten people that do that, or every hundred people, maybe only one, or for every thousand people, only one really is successful.
And I think that’s the point is that when you don’t acknowledge how lucky you were as an entrepreneur, you begin to assume you’ll be equally successful as an investor. Not all investors are successful either, and they all, and many have the same or similar good ideas. So this transition is really at the core of what we’ve been learning about for 25 years.
Ben Fraser: So talk about that transition. How do you make that transition, right? How, what was your experience? After you sold your second business, you started this group and learned a new set of skills which is now evaluated investment, wealth preservation.
Michael Sonnenfeldt: The most important learning for me and for many other tiger members is to have, um, to engage in what I’ll call unnatural acts to become a better investor.
So when I sold my business, when I was 43. One, one friend convinced me to invest 10% of the proceeds in his hedge fund. I wouldn’t invest 10% today in a single hedge fund right after I sold my business. Today I might invest 2% or 5%. Obviously you don’t want to have so much diversification.
That it becomes what we call diversification. If you have too much concentration, one of the things that few people, most people forget is when you’re a successful entrepreneur, most successful entrepreneurs, the business might throw off some money and they might start making investments. But when you have a business that’s generating profits or cash every year, when you make a bad investment, you don’t have to talk about it at the cocktail party.
You can sweep it under the carpet. And not talk about it because if you’re making, I’m just making a number up to 2 million a year. Obviously that would be fantastic. But if you’re making 2 million a year, you made a half a million dollar investment last year that went bad. You don’t have to tell anybody because next year’s 2 million of earnings will cover it.
So one of the things that really trips up successful entrepreneurs is when they’ve been a successful investor as an entrepreneur. Because they had the backup of the annual profits from their business to cover up any mistakes they’ve made. But once they sell their business and there’s no continuing source of profits, when you lose capital as an investor without a business, you can never regain, or it’s hard to regain that capital.
So it’s a different risk profile even for the same type of investment. Depending on whether you have an underlying business that can allow you to sweep the bad investments under the carpet. So I think that’s a good thing for people to remember about the difference between being an investor after you’ve sold your business and being an investor while you still own your business.
The Role of Diversification in Investment
Ben Fraser: Yeah, that’s an amazing point. Talk a little bit more about the diversification kind of principles. Cause I’m, on one hand you have. Modern portfolio theory says there’s no such thing as a free lunch, except diversification is somewhat of a free lunch. And then you have Warren Buffett, I forget the status quo, but he says, diversification is for those who, or maybe it’s Charlie Munger, diversification is for those who don’t know what they’re investing in, right?
So there’s kind of two sides to this and you just threw out the term, which I love, diversification, right? There is a point of diminishing returns. How have you wrestled through that over the years as members of Tiger 21? How did you guys approach diversification and where’s that sweet spot maybe?
Michael Sonnenfeldt: I think the most fundamental question that somebody has to ask after they’ve sold their business Is, are they an entrepreneur or are they going to be an investor? Now when I say that, obviously if they’ve sold their business, you could maybe ask the question, am I going to be an entrepreneurial investor or a classic investor?
The terms are not that important, but I’m trying to make a distinction. between somebody who takes all of the money that they make and invests it in a kind of wealth advisor portfolio. A portfolio has nothing to do with the individual investor’s expertise or history. But they think about themselves as a wealth manager and they have a classic so much in the S& P and so much in debt and if you want to get more complicated, you could do some ETFs, you might have some real estate, but fundamentally, you’re what I would call a passive investor.
And all you’re doing is allocating capital like the best professionals.
Understanding Market Expectations and Investment Risks
Michael Sonnenfeldt: If you’re doing that and that’s perfectly fine, you need one set of expectations. And that set of expectations is that you can’t beat the market. The market has earned plus or minus nine or nine and a half percent. Stop talking about the equity market for a hundred years.
And if you had a 100% of your money in the market. If you had an expectation that you would earn more than 5% over time, you’d be a fool. But it’s almost impossible even to get to that 9. 5% because generally you have some cash that you put aside. And the big thing about that 9.
5% is one year you might be down 30% and the next year up 39. 5%. But if you needed to take money out to buy a house or give your kid a gift, You might be a, you might be forced to liquidate at exactly the wrong time.
The Importance of Prudent Investing and Market Timing
Michael Sonnenfeldt: If you’re a prudent investor, you want to hold enough cash that you’re not forced to liquidate your best holdings, which might be down in value at the wrong period of time.
And that’s why the amazing thing is, even though the stock market is up 9. 5% cumulatively, or 9% for 100 years, The average investor apparently is only made four to 6% over those hundred years, precisely because they tend to buy at the wrong time and sell at the wrong time. And then you have the drag of paying taxes.
The Role of Expertise in Successful Entrepreneurship and Investment
Michael Sonnenfeldt: So you know, this issue of what I’m trying to get at is how much, if you’re a successful entrepreneur, how much of your capital Will you segregate out of what I’ll call general market investing and put into a business as a startup that you might have expertise in or a business. If you were a printer and you sold your printing business, maybe you’re better able to look at three public companies that are in the printing business and determine which is the best one based on your.
Expertise. But my point is that it’s only if you can get out of being a general investor, like a wealth manager and successfully deploy the unique skills that you might’ve developed as an entrepreneur, that you have any reason to expect you can earn above market returns. What this is called is, do you have an edge and having an edge as an It’s probably the most important determinant of long term values.
So when I see people who are investing their capital like a wealth manager, but having an expectation that they’re going to earn 50% more than the best wealth manager, I don’t have to look at their balance sheet. You have to start with their understanding of the risks.
Warren Buffett’s Investment Strategy and the Concept of ‘Edge’
Michael Sonnenfeldt: And possibilities are, it’s why Warren Buffett has told his family, after he’s gone, they’re better off just investing in the S&P, because he’s not even sure Berkshire Hathaway can keep up.
And by the way, Berkshire Hathaway’s returns aren’t that great either. All of Warren Buffett’s returns occurred in the first 40 years of his career. The last 20 years, he’s basically mirrored the S& P, not much better. It’s amazing, it didn’t even match the Nasdaq if the QQQ’s in the Nasdaq.
So even Warren Buffett understands what it means to have an edge.
The Challenge of Investing Post-Liquidity and Recognizing Your Edge
Michael Sonnenfeldt: But I do think when you talk about investing post liquidity, you have to decide whether you have an edge, then you have to be right. And most entrepreneurs think they have an edge, and that’s the hardest thing that experience stands off with the passage of time.
Most competent entrepreneurs, five years after they’ve sold their investment, are humbled by how little of an edge they actually have. And it’s the rare entrepreneur that can actually figure it out. But the summary of my point is that. Thinking about where an entrepreneur has an edge as an investor is probably the single biggest indicator of whether a post liquidity entrepreneur can beat the market or not.
And it’s a rare person who can.
Ben Fraser: Yeah that’s so good, so interesting. A little bit of an aside, but I’d be curious what was your take beyond why Warren Buffett’s returns have lagged. Would larger capital allocations be difficult to exploit niches because it’s just by, by size and volume?
Or what would you say is the reason?
The Impact of Market Efficiency on Investment Returns
Michael Sonnenfeldt: Over the last 20 years, the markets have become more and more efficient, although they were efficient before, so there’s fewer opportunities. And when you combine that with the scale of Berkshire Hathaway. It’s one thing to earn above market returns on a 10 million portfolio, but it’s pretty hard to earn above market returns on a $300 or $500 billion portfolio.
It’s just not possible. It’s either you’re taking too much risk or the minute you’ve diversified, you now are. You know, you’re stuck with the alpha with very little alpha and tied to the beta of the market, the average of the market return. Yeah. That makes sense. It’s a little like if you look at a company like IBM, at one point, I don’t know what it is today, but years ago they had 300, 000 employees.
You could say statistically. Their employees weren’t a lot smarter than the average, but their performance was. So it wasn’t that they had hired smarter people. It’s that they had better policies, better organization. But my point is when you’re a big enough investor, it’s very hard to beat the market.
It’s just the, it’s almost like a law of nature. Yeah. Unless you’re going to take risks and then you’re fooling yourself.
Exploring Diversification in Investment Strategy
Ben Fraser: Going back to the diversification question, I’d love to dive a little more into that because there are different layers of diversification, right? So assuming you’re going to now go more classic investor, more capital allocator approach and try to create a passive portfolio.
What’s interesting insight to me is something for our podcast, we focus a lot on alternative investments because. The mass affluent are less educated on private alternatives and they’re mostly in stocks and bonds. And one of the cool things that I’ve seen from the quarterly portfolio reports you guys put out is there’s generally a pretty healthy allocation into alternatives, across the board.
It’s not everybody, but an aggregate, simple numbers from my recollection are: 25% in public equities, roughly 20 to 25% in real estate. Same for private equity and the other 25 mixed across a lot of other things commodities, businesses all those kinds of things.
Could you talk a little bit about how you view, not only asset class diversification, but public versus private diversification. Where do you see the alternative portion of a portfolio? What’s the purpose of that? What’s the value of that? Obviously, you’re giving up liquidity at many times, but sometimes you can generate higher returns through the illiquidity premium where, what’s the purpose in that?
And should an investor consider certain allocations and create the framework for us on that?
Michael Sonnenfeldt: Sure. There are tiger members who sell their business and they might put 60% of their money into S and P’s, the standard import S and P 500, it’s an index fund that obviously mirrors almost precisely.
What the market returns are, and they put it on autopilot and they go play golf or they get involved in charitable activity or they spend time with their grandkids or they do whatever they want. That is a wise decision. That person just wants a passive allocation. Yeah. And maybe if they want to put a portion in fixed income, we could debate long term, short term, the classic balance between fixed income.
And then you have to say anything. You do beyond that have two issues. One is, are you taking on more risks than that basic decision and are you likely to get more return? You might get more return on average, but you also might add a lot of risk. So when you do that I would rather earn 5%. Or 50 years on a government bond or 7% in private equity, knowing some years I might get wiped out or some years it’s a, it’s just people’s risk tolerance.
But I think the point that you’re getting at is the minute you deviate from either all S& Ps or a 60 40 split. which gives you certain liquidity, you’re taking on a risk that most people are not capable of assessing. And because risk is in the eyes of the beholder sometimes, it’s hidden and never really looked at.
People waste way too much time on returns, and not nearly enough time on risk. That would be the first pitfall most investors make. Along the way, There are certain steps that you can see. In other words, somebody would say, instead of S&Ps, I want to have a small cap waiting and, but you’re talking about really marginal benefits.
If you’re staying in the public equity markets and you’re broadly diversified, is the, if you sleep a little poorly, but you got another one 10th of 1% return, is that a good trade off? For some people it is, for some people it isn’t. But Tiger members are a very distinct subset. of the investing world.
One because their level of success is one and 10, 000. And two, because most Tiger members developed some leverageable expertise along in their career. So if they can take any portion of their expertise and get an edge in making a private equity or real estate investment. Then and only then can they begin to have an expectation that they’ll beat the market returns and even then it’s quite difficult.
The Role of Private Equity and Real Estate in Portfolio Allocation
Michael Sonnenfeldt: So as an example Tiger members have almost 30% in private equity and over 20% in real estate. So most of the real estate is private as well and only 20% today in public equity. On one hand, if you add those numbers up, it’s about, it’s between 75 and 80%. That would be a long biased portfolio.
That would be a risk on the portfolio. If you don’t believe that the economy over a long period of time will continue to prosper, you probably don’t want a long biased portfolio. You want a more defensive portfolio, but you’re not going to earn the kind of returns that you want to earn. And the more defensive it is, what you’re defending against is to preserve sometimes cash flow over returns.
TIGER members got to be TIGER members because they started businesses and wherever they can leverage their skill of rolling up their shirt sleeves, getting involved in a business, they’re not investing by and large in the global private equity funds. Those are great funds, the KKRs and the Blackstones.
And TPIs and Goldman Sachs and all of those, they’re investing in what are called SMIDCAP, small to mid cap private equity funds and startups. Because when you were a business owner, you were, if you were a good business owner, you were the first to know when there was a problem and you were the first to pitch in to try and help.
So where Tiger members can get involved in a small company. When they learn about a problem early enough that their expertise can be to help that problem, that manager can solve the problem, they can add real value and tip the scales of return. Same thing as buying a piece of real estate. It’s not like buying a REIT.
You buy a piece of real estate. If you own it, you can kick it, you can see it, you can walk it, you can sense when the neighborhood is changing, you can see where the retail is going. So there’s a lot of advantages to various forms of private equity. provide to investors, but only if they have an edge and they have the capability of deploying it.
If I have no expertise, the benefit of private real estate and private equity is much less than if I have leverageable expertise. And one of the things that I try to do is many Tiger members, when they sell their business, they want to give All of their proceeds to really world class wealth managers.
That’s like putting on blinders and tying your hands behind your back. You’re depriving yourself of the, of that which allowed you to become a 1 in 10, 000 entrepreneur. I personally spend a lot of time on Investments where I can be involved, not passive, where I can open my networks to be helpful or I can bring experience to bear.
And I think this goes back to why I’m saying when you have a liquidity event, if you want to go play golf or you want to go to the moon for that matter, you want to do whatever you want, perfectly fine. You’ve earned the right to do that. I don’t make any judgment about it. Many people want to have their cake and eat it too.
They want to act as if they have an edge. But they don’t really think about it. And it takes years and years to understand enough about the way the world of investing works to figure out where your edge is and where your edge is just a bad reflection of an ego gone wild that you’re looking at in your mirror.
Ben Fraser: Now, I love everything you said there, and it sounds to me what I’m hearing. As well as the portfolio allocation partly mirrors and reflects the skill sets that a lot of people that are in Tiger 21 leverage to become the successful members, which means, Hey, they ran businesses, so they understand business ownership and private equity.
That makes sense. And for your background, you. Made a lot of money in real estate and so you understand real estate and so you can leverage that into having a heavier allocation. And to me, it comes back to a simple mantra of just invest in what you know, right? Exactly.
The Importance of Investing in What You Know
Ben Fraser: It’s if you have, you said a leverageable experience, like that’s so powerful because that’s the only way to create the edge.
Otherwise why do all the extra work, all the extra risk to not generate much extra return? That’s such a wise,
Michael Sonnenfeldt: Yeah. One, one way to think about it. If I’m just making this number up when I think of all of the time post liquidity entrepreneurs spend on investments over half the time is totally wasted because they and they don’t spend enough time that both of those are true.
But what I mean is that over half, the time is totally wasted because they’re spending lots of time on lots of individual investments. But it doesn’t reflect an edge where those investments are likely to outperform and we all fall prey to that. I have some investments. I thought they were great investments, but after many years, I realized I didn’t have the assessment tools or the insights or I didn’t get the good luck that I had hoped for.
So my point is that, This notion of where do I really have some distinctive competence, where do I have some unique knowledge and how do I make sure the investments I make actually reflect the very specific unique knowledge that I have. That’s where the outperformance comes from.
Legacy Planning and Wealth Transfer to the Next Generation
Ben Fraser: I love the shift last little part here just to legacy, right?
Next generation, kids, transfer of wealth. What’s your perspective on that? Cause you. You take a strong stance in the book there, don’t give your kids anything, but be willing to invest everything in them. So explain your thought process behind that and what you mean by that.
Michael Sonnenfeldt: This issue of legacy weighs heavily. On anybody who’s been successful enough where they’ve raised their children in a situation that might be much more advantaged than where they were raised, many tiger members. This is true about first generation entrepreneurs. Many tiger members came from very poor, lower middle class backgrounds, but many were stressed with alcoholism And ADHD, lots of challenges.
In fact, the more challenged you are as a child, when you grow into adulthood, wanting to show the world that you can be more than the expectation the world has had for you, the more motivated you are to be successful and the more likely you are to be successful. There’s something called the Marshmallow Test.
I don’t know if you’re familiar with it or your listeners are, but a Stanford professor basically put one marshmallow in front of each of maybe 23 year olds at a table and said, don’t eat the marshmallow till I’m back. If you wait, I’ll give you two marshmallows and then disappear. I forget whether it was for 20 minutes, but whatever seemed like an intolerable amount of time for those kids.
And when they came back, they found that most of the kids Couldn’t wait. And they ate the marshmallow and only a few kids had the discipline to wait because they knew they’d get two marshmallows. It turns out that of any test that has ever been devised to predict future success with a three year old.
This is the single most successful indicator of future success. They took generations, they tracked kids for 30 years, and it’s very simple. The most important aspect of particularly private investment is delayed gratification. Unless you can forgo today so you can invest for tomorrow, you’ll never be a competent entrepreneur or investor for that matter.
And so this issue about delayed gratification is the most important indicator of who can be successful or not. When you go and see a guy who opens up a diner and raises some money, and he goes out and buys a fancy car, you can be pretty sure he’s not going to be that successful, because he should put the money in the diner so the diner can be so successful.
He can buy another diner and a diner, another diner, somewhere along the line, he can get the fancy car. But unless you learn how to delay gratification, being a long term investor is probably not for you.
Ben Fraser: Yeah. So how do you apply that to transfer of wealth with kids?
The Importance of Teaching Financial Stewardship to Children
Michael Sonnenfeldt: Sure. Yeah. You asked me about kids. I got off the track. My point is that when you bring children up. with the advantages that successful entrepreneurs have. And when you don’t have well defined thoughts about how children should be educated, the spoiling of young children in wealthy families really prevents them from learning about delayed gratification.
Because every time they want something, you give it to them, and they then become accustomed to thinking that’s the way the world works. So one of the most important things about multigenerational wealth is teaching kids how to delay gratification. Some of it’s personality, but like everything, some is nature and some is nurture.
But if your kids don’t have the ability to learn how to be stewards of the wealth that you have. What you’ll find is that if you give them too much money too early, not only do they waste it, but they don’t build the skills that are necessary and maybe they don’t even pursue the careers that they should be pursuing because they think they don’t have to because the money will last forever.
So I think that one of the things that’s really interesting among Tiger members is separating out. The difference between their kid’s ambition and their kid’s risk tolerance. Very often a first generation entrepreneur will see a kid and say, he’s, he or she is never going to amount to anything because they’re too scared or they’re not willing to take a risk.
They’re always willing to, they just want to work for an employer. They want to have a job and a paycheck. They, whatever it is. And many parents say they have no idea what risks I took and yet they’re not capable. It turns out if you grow up with wealth, you are by definition going to be more risk averse because any great entrepreneur who started with nothing has to be a risk junkie or has to be accommodated.
to levels of risk that children who grew up in more successful circumstances are never subjected to. So this issue about risk tolerance I have many Tiger members whose children are amazing and they’re incredibly ambitious. They’re just not risk seekers like first generation entrepreneurs. Another thing about how you help kids is teach them to be stewards of their wealth so that they don’t get to be 30 or 40 years old, not knowing about the wealth that they might inherit or anything about how to manage it.
And, different families teach their kids in different ways. There’s lots of different modes, but I think a majority of first generation wealth creators do not teach their children. about wealth because they feel that the children’s success will only come if they do it, quote, on their own. But they never raise the kids to do it on their own.
They raise the kids to successful parents. And so it’s a little giving kids every advantage until they’re 21. And then one day Pulling the rug out from underneath them and saying, I had it when I was tough and I was 21. You have to do the same. I don’t think that’s a good philosophy.
There has to be some connection between the success that parents have. It’s precisely because most first generation kids’ parents were not successful, that the kids were driven to be successful and do better than their parents. But when parents are successful, it’s a different set of skills. And one of those skills is learning how to be stewards of the wealth that you inherit, having had a discipline of maybe only spending 2% of your inheritance each year.
It’s amazing. If you tell a 20, an average 23 or 25 year old, you just inherited a million dollars. How much can you spend each year without jeopardizing your inheritance? Get the craziest ideas. It’s, you can’t even, you can’t even Amazing. Oh, I could spend a hundred thousand or a hundred and fifty thousand.
If you spend a hundred thousand, the money will be gone in 10 years or less. And so the 2% rule is something that’s evolved at Tiger that if you just look at the assets that you inherit or that you’ve earned and you only spend 2% a year, you can’t go wrong. Of course you can make some bad investments.
But if there were one rule I teach kids, it’s don’t spend more than 2%, make that like your income, and live your life accordingly. If you happen to make, I’m making a number up, 100, 000 a year, and the 2% of your 5 million, It’s another 100, 000. Live your life like you’re earning 200, 000 a year, not like you’re worth 5 million a year.
Yeah. That’s really good. Excuse me. Not like you’re worth 5 million.
Ben Fraser: Michael, this is so fun for me. What a special treat. And I’m sure our listeners will get a lot from this.
The Role of Tiger 21 in Supporting Successful Entrepreneurs
Ben Fraser: I know I did. What’s the best way for people that are maybe interested in learning about Tiger 21 and want to explore what it would be to join that community?
Could you share a little bit of
Michael Sonnenfeldt: Sure, Tiger. Our website is https://tiger21.com. We have groups, now all over the world in 46 major cities growing to 60. We’re primarily focused in North America with a growing presence in Europe. The Middle East and Singapore and obviously the book you mentioned is a nice gateway into the world of Tiger 21 and the kind of lessons you would learn from fellow members.
But, in the end, being thoughtful, we all have blind spots. And while we’ve created Tiger 21 to help people identify their blind spots by peers who may have had similar issues, we now have a collective intelligence and a collective experience that’s unrivaled. I’ll just leave you with one example, if I can.
We had a member go on our internal web the other couple weeks ago saying, ” I’m here in Tampa. And I have a medical emergency. I have to get to Dallas in three three hours for whatever reason. Can somebody help me? And one of our other members said, Oh, I just got off our plane. My pilot is waiting.
I can send him from West Palm to Tampa and get you over to Dallas. They didn’t know each other. But when you have a kind of network that’s really committed to mutually helping each other. The resources that I’m talking about could be about a disease. It could be about a business opportunity. It could be about meeting somebody, but we like to say we’re the premier network of high net worth entrepreneurs around the globe and put a lot of effort into trying to make it as valuable as possible.
Ben Fraser: Michael, thank you so much. Again, this was really special. interview and really appreciate you taking the time to chat with me.
Michael Sonnenfeldt: Great to be with you. Thanks so much.