Investing Like the Ultra Wealthy Ft. Tiger 21 Founder Michael Sonnenfeldt

Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. Got a very special episode for you today. This is one I was very excited to record. Our guest today is Michael Sonnenfeldt, who is the founder of Tiger 21, which is an organization that 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 kind of get around other peers. And so it's now grown to, I think, over 1,200 members all across the world and combined about $150 billion of combined net worth across their members. So it's really ultra-high net worth families. 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 becoming investors, because the skills that make you a good entrepreneur don't necessarily make you a good investor. And 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, 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. And again, if you are enjoying the podcast, please do share with a friend, subscribe, leave a review. All those things help us just 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. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Welcome back to the Invest Like a Billionaire podcast. 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— have you share some of your insights.

Thanks. Great to be here with you.

Yeah. 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, really enjoyed a lot of things here. So I'm excited to dive in, but give a little background for those that may not be familiar with you.

So let me talk about Tiger first, if I may.

Sure.

Tiger is about to celebrate its 25th anniversary. Hard to believe, but we were started 25 years ago when I had sold my second business. I was 42 years or 43 years old, and when I had been 30, 30 or 31, I sold my first business. I had been a large real estate development 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 principal as I had risked after my first sale, because 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 sort of like me who had been really successful entrepreneurs, but now were 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 their nose to the grindstone for 5 or 10 or 20 or 30 years. And all of a sudden you sell the business and you look up kind of like 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. So Tiger started 25 years ago with 6 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 the increasingly we became a little more concerned about the whole life that people who've been incredibly successful jump into after a liquidity event. But I think in sum, today, here we are 25 years later as the premier investment network around the globe. We have 1,300 members, each of whom joins a monthly meeting somewhere on the globe. We have 104 groups that are 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 of times a year. So for people who are kind of on the go or live in a remote location, they might not want to meet monthly in person, but they do so by by Zoom, and, uh, our members manage about $150 billion. Uh, so by any stretch, the best way to think about it is although our members on average manage between $20 million and $1 billion of personal net worth, um, the average is a little over $100 million, uh, in order to get to the $150 billion. And that means that our members are sort of 1 in 10,000 by accomplishment. A good way to think about it is if you're in 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 kind of like taking the wealthiest 5,000 people out, the billionaires. Right. 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, well, thank you for that. And, you know, you guys publish a quarterly report, which I have loved reading, right? As someone who's kind of on the earlier end of my wealth building, and I know a lot of our listeners It's been— it's really helpful because you have a really great sample of data, right? $150 billion of total net worth is pretty meaningful. And to see the breakdown of how your members aggregately are investing their portfolios and invest those portfolios over time because it's in your— you're changing it in real time. It's, it's so valuable. And, you know, the whole theme of this show is Invest Like a Billionaire. Well, there's a lot of billionaires in your group and there's so much that we can learn you know, from, you know, just from each other and from people that are— have attained those levels of success and what they've done. And what I'd like to do in this interview, you know, your book is awesome because it's really focused for entrepreneurs. It goes through 5 different stages. You know, the first few are kind of, you know, know yourself, self-assessment, building the team, scaling, growing. And so we have a lot of folks listening to this podcast that are entrepreneurs that are in that, you know, 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 you, I go get, 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 your stage 3, I think it's risk management. Is kind of the focus. And you talk about the idea of, I think it's portfolio defense, right? Which is a really interesting— have some great stories in there, but it's, it's— 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 a various point in that same journey, We have a deep commitment to a learning process that comes from peer-to-peer learning. We, 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.

Yeah. And there's no real financial incentive that they have, right? It's just purely from a curiosity or learning or let's improve.

Not curiosity. Everybody is there to learn from one another and to offer advice that they wouldn't get anywhere else.

Yeah. Well, one of the, one of the stories in there was kind of funny where, you know, one of the members I think was presenting and he had a 75% allocation into one fund. And, you know, hey, the performance of this fund 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.

Sure. You know, it was a— 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, you know, they said, you know, 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 than they could earn, than 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 Madoff, but we had an absolute rule that we'd have 14 or 15 funds and each investment would be no more than 7 or 7.5% of the total. So while we thought Madoff was doing very well, and some of our investors were saying, why don't you have more than Madoff based on the returns? I said, because our discipline is not to put more than 7 or 7.5% 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, you're throwing a pair of dice that are stacked against you. And this member said, you know, 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 of months after that. It might have actually been a month or two after that that Madoff imploded. And it was just sort of a classic example about I wouldn't say so much risk and greed, but about thoughtful diversification and trying to ensure that your legacy is not that you wasted the assets that you spent a lifetime creating, but that you manage them smartly for yourself and your children.

Yeah, I mean, that's definitely a poignant story because we could all get caught in those traps, right? And one of the other points you made is, is so interesting because it kind of hits you right in the face. But when you break it down, it actually makes a lot of sense. And you said, you know, entrepreneurial skills can 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're actually investing and trying and shifting to a wealth preservation mode. We can talk about that a little bit of where, where do those skills kind of catch people, you know, in a bad spot.

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, you know, 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 kind of the same? But it turns out that the skills and very nature of people who are entrepreneurs tend to be idea 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 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. You know, 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, but it's a lot easier. It's hard to believe. It's a lot easier to earn 25% returns for 2 or 3 or 4 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 blinds you on average to the limitations that you have as an investor. You know, if you're the world's largest paperclip manufacturer, you know more about paperclips than anybody else. And you know a little bit about metal and you know 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's been investing for 10, 20, or 30 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 being an investor with the wrong understanding of concentration because 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 investment risks of 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. But for many entrepreneurs, looking at an investment portfolio kind of feels like watching the paint dry. The, the time frame is completely different. And so you have a series of things that predispose great entrepreneurs to be poor investors. 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 sort of 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.

Yeah, that's so interesting. And you kind of 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, you know, wealth is created by concentration, but it's preserved through diversification. Right. So 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, you know, the opportunities other people can't see because of your perspective. But then to then apply that same approach to investing, it takes a different skill set.

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. But remember, if you're a Tiger member, you're only 1 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 so 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 10 people that do that, or every 100 people, maybe only one, or for every 1,000 people, only one really is successful. And I think that's, 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. But 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.

So talk about that transition. How do you make that transition? Right. What was your experience after you sold your second business and you kind of started this group and learning a new set of skills, right, which is now evaluating investment, wealth preservation?

Sure. You know, the most, the most important learning for me and for many other Tiger members is to have to engage in what I'll call unnatural acts to become a better investor. So when I sold my business when I was 43, you got 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. But if you have too much concentration, you know, 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— $2 million a year, obviously that would be fantastic. But if you're making $2 million a year and 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 over. 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, sweep the bad investments under the carpet. So I think that's a good thing for people to remember about sort of the difference between being an investor after you've sold your business and being an investor while you still own your business.

Yeah, that's an amazing point to talk a little bit more about the diversification kind of principles, because on one hand you have You know, Modern Portfolio Theory says there's no such thing as a free lunch, except diversification is, you know, somewhat of a free lunch. And then you have Warren Buffett. I forget the quote, but he says, you know, diversification is for those who— or maybe it's Charlie Munger, you know, diversification is for those who don't know what they're investing in. Right. So there's, there's kind of two sides of this. And you just threw out the term, which I love, you know, diversification, right? There is a point of diminishing returns So how have you kind of, you know, wrestled through that over the years? And as members of Tiger 21, how do you guys approach diversification and where's that sweet spot? Maybe.

So 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 invest it in a kind of wealth advisor portfolio, a portfolio that has nothing to do with the individual investor's expertise or history, but they sort of 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. If you're doing that, and that's perfectly fine, you need one set of expectations. And that set of expectations is you can't beat the market. The market has earned plus or minus 9 or 9.5%. So I'm talking the equity market for 100 years. And if you had 100% of your money in the market, If you had an expectation that you would earn more than 9 or 9.5% 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. So 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 has only made 4 to 6% over those 100 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. 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 3 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 have 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, and having an edge as an investor is 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 what their understanding of the risks 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, 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 kind of amazing. Didn't even, didn't even match the Nasdaq if the QQQ is in the Nasdaq. So even Warren Buffett understands what it means to have an edge. 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 Most entrepreneurs think they have an edge, and that's the hardest thing that experience sands off with the passage of time. Most competent entrepreneurs, 5 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 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.

Yeah, that's, that's so good. So interesting. A little bit of an aside, but I'd be curious, what would your take be on why Warren Buffett's returns have lagged? Would it be larger capital allocations or difficult to exploit niches because it's just by, by size and volume? Or what would you say is kind of the—

Over the last, 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, you know, 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, right? Unless unless you're going to take risks and then you're fooling yourself.

Going back to the diversification question. Yeah, I'd love to dive 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 and create a passive portfolio, you know what? 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, you know, across the board. You know, it's not everybody, but in aggregate, you know, it's simple numbers from my recollection or, you know, 25% in public equities, roughly 20 to 25% in real estate, same for private equity, and the other 25% mixed across a lot of different things, you know, commodities, businesses, all those kind of things. So could you talk a little bit about how you view, you know, not only asset class diversification, but public versus private diversification? Where do you kind of see for the kind of alternative portion of a portfolio What's, what's the purpose of that? What's the value of that? Obviously, you're giving up liquidity many times, but sometimes you can generate higher returns through the illiquidity premium. Where— what's the purpose in that? And, you know, should an investor consider certain allocations and create the framework for us on that?

Sure. There are Tiger members who sell their business and they might put 60 or 70 or 80% of their money into S&P, the Standard Poor's S&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. But, you know, the classic balance between fixed income. And then you have to say anything you do beyond that has two issues. One is, are you taking on more risk than that basic decision? And are you likely to get more return? Well, you might get more return on average, but you also might add a lot of risk. So when you, uh, so would I rather earn 5% for 50 years on a government bond or 7% in private equity, knowing some years I might get wiped out, or some years It's, 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&P's 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. But along the way, there are certain steps that you can see. In other words, somebody would say instead of S&P's, I want to have a small-cap weighting. And but you're talking about really marginal benefits if you're staying in the public equity markets and you're broadly diversified. You know, is the— if you sleep a little poorly but you got another 0.1% return, is that a good tradeoff? Well, for some people it is. For some people it isn't. But Tiger members are a very distinct subset of investing world. One, because their level of success is 1 in 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, 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. 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. So through 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 portfolio. If you don't believe that the economy over the 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. But Tiger members got to be Tiger members because they started businesses. And wherever they can lever their skill of rolling up their shirt sleeve, getting involved in a business, they're not investing by and large in the global private equity funds. Those, those are great funds, the KKR and the Blackstones. And TPIs and, you know, Goldman Sachs and all of those, they're investing in what are called SMID caps, 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 where they learn about a problem early enough that their expertise can be to help that problem, that manager 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 that various forms of private equity provide to investors, but only if they have an edge and they have the capability of deploying it. If, 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 and 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 kind of like putting on blinders and putting, you know, 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. So I personally spend a lot of time on investments where I can be involved, not making 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, but many people kind of 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 an edge and where your edge is just a bad reflection of an ego gone wild that you're looking at in your mirror.

Now, I love everything you said there, and it sounds to me what I'm hearing as well is 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, I mean, 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. 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, why do all the extra work, all the extra risk to not generate much extra return? I mean, that's such a wise—

Yeah. One way to think about it is I'm just making this number up, but 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. Both of those are true. But what I mean is 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 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.

Yeah. I'd love to shift kind of the last little part here just to legacy, right? Next generation, you know, kids, transfer of wealth. What's kind of your perspective on that? 'Cause you take a strong stance in the book there, you know, don't give your kids anything, but be willing to invest everything in them. So explain, explain your, your thought process behind that and what you mean by that.

You know, um, 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 either poor, lower middle class backgrounds, but many stressed with alcoholism and ADHD. Lots of challenges. In fact, the more challenged you are as a child where 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. But, you know, 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 2 marshmallows. And then disappeared. 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 2 marshmallows. It turns out that of any test that has ever been devised to predict future success with a 3-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 forego 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. You know, when you, 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 another diner and another diner. Somewhere along the line you can get the fancy car. But unless you learn how to delay gratification, being a long-term investor is probably not for you.

Yeah. So how do you kind of apply that to transfer of wealth with kids?

Is it— 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 is among Tiger members is separating out the difference between their kids' ambition and their kids' risk tolerance. Very often a first-generation entrepreneur will see a kid and say, you know, 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. Well, 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 kind of has to be a risk junkie or has, has to have 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, you know, 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 like, you know, giving kids every advantage until they're 21 and then one day pulling the rug out from underneath them and say, 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, if you tell a 20, an average 23 or 25-year-old, you just inherited $1,000,000. How much can you spend each year without jeopardizing your inheritance? You get the craziest ideas. You can't even, you can't even— amazing. Oh, I could spend $100,000 or $150,000. Well, if you spend $100,000, 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. I mean, 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. So, you know, if you happen to make— I'm making a number up— $100,000 a year, and the 2% on your $5 million is 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, really—

excuse me, not like you're worth $5 million.

Right. Well, Michael, this is— this is so fun for me. What a special treat. And I'm sure our listeners will get a lot from this. I know I did. And, you know, 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.

Sure.

You share a little bit of what you do.

Tiger. It's— our website is www.tiger21.com. We have groups, you know, 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, 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, you know, 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 of weeks ago saying, I'm, I'm here in Tampa and I have a medical emergency. I have to get to Dallas in 3, 3 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— what 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 the high net worth entrepreneurs around the globe and put a lot of effort into trying to make it as valuable as possible.

Well, Michael, thank you so much again. This was a really special interview and really appreciate you taking the time to chat with us.

Great to be with you. Thanks so much.