We Study Billionaires - The Investor’s Podcast Network - TIP525: Secrets from a Private Billionaire Club w/ Michael Sonnenfeldt

Starting point is 00:00:00 You're listening to TIP. My guest today is Michael Sonnenfeldt. Michael is a lot of things, one of which is a successful real estate entrepreneur who has a record for one of the most successful real estate deals of all time. He's also the founder and chairman of Tiger 21, a private club of billionaires and first-generation wealth creators who rely on each other for continuous learning as it pertains to the economy and wealth preservation. He's also the author of the book Think Bigger and 39 other winning strategies from successful entrepreneurs. In this episode, you will learn what Michael learned from achieving his dreams early in his 30s and what he's learned from subsequent wins and losses. How it led him to found Tiger 21 and how he leveraged surveys from the group to better

Starting point is 00:00:41 understand the economy and preserving wealth. Michael's personal views on recession risks, education, meditation, and a lot more. Michael's experience is wide-ranging and he has a very big heart. I felt like I could have talked to Michael for hours longer and I hope you enjoyed it as well. So here is my conversation with Michael Sonnenfeld. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Trey Lockerbie, and today, I'm very excited to have with us, Michael Sonnenfeld.

Starting point is 00:01:29 Michael, thank you so much for coming on the show. Thanks for having me. Great to be here. We are going to be talking a lot about markets and psychology around people. building and preserving wealth. You've been an incredibly successful entrepreneur after starting out at Goldman Sachs and then moving into real estate and many other things, all of which I'd like to cover, but I'd like to start by just highlighting your upbringing a little bit and an effort to learn a little bit more about what drove you to some of the choices you made early on. In your book, which I have here, and I really enjoyed it. It's called Think Bigger and 39 other

Starting point is 00:02:02 winning strategies from successful entrepreneurs. We're going to talk about a few of those as well. But you talk a little bit about your father, Richard Sondfeld, who sadly passed in 2009, but lived this extraordinary life so extraordinary that there's a line about him surviving a torpedo attack, but you almost kind of gloss over it, you know, and missed all these other interesting facts about him. So can you tell us a little bit about who your father was and how he shaped you and your career? Sure. My father grew up in Germany in the late 20s and 30s. And his family was an assimilated Jewish family in Germany, by which I mean they had Christmas trees. They didn't have much of a Jewish identity. And his parents were both doctors who had moved to the rural countryside to serve what the Germans used as a term that would be translated as peasants. We have a probably don't love that term anymore, but that was in common use.

Starting point is 00:03:03 You know, it was farmers and people who lived off the land and didn't have lots of money, but were decent, honorable people. And his parents moved out in the flurry of liberalism that came after World War II to serve the rural poor. But it was only in the 30s when Hitler came to power that this town of Gardellegen that happened to have nine Jewish families, they didn't even know each other because that wasn't what their identity was. When Hitler came to power, all of a sudden, they did know who each other was. And eventually between the rising anti-Semitism and eventually the

Starting point is 00:03:41 Nuremberg laws, you couldn't work, you couldn't earn money. And my grandparents were smart enough to get their two sons out of Germany to a boarding school in England that had been set up to accept German youth. It was a Quaker school that actually had been in Germany and moved to England. And my father, age 16 and his brother, age 14, went to that school. And they weren't there too long before the British interned all Germans, age 16 and above. Just like we interned the Japanese here, didn't matter whether in the English case, whether you were a Nazi or Jewish, you were considered an enemy alien and he was shipped off to an Australian prisoner of war camp at the age of 16. And by then he was speaking English because he'd been in England for a year or two

Starting point is 00:04:32 and he was able to convince the commandant of the camp that he wasn't a Nazi and in fact he wanted to fight Nazis. And somehow he was able to convince the commandant of that camp to send him back to England that a great mistake had been made. And he'd, did. When he'd come to Australia, it was on a famous boat called the Dunera. It was a movie about that. And when he was shipped back, he was on the Donara, but it was attacked. That's the torpedo that you mentioned. And he was led off at age 17 and 1940 in Bombay by himself. And believe it or not, he was able to get a job in a radio factory because he was a brilliant future engineer. He actually became the manager of the factory, befriended Nehru, who would later lead India, I have letters at home,

Starting point is 00:05:23 and eventually made his way back to the United States after a period of time in India, where his parents had escaped from Germany through Sweden. And he eventually enlisted in the army, and at the end of World War II, he was asked to be a translator by General Bill Donovan, the founder of what was then the OSS, that's the precursor to the CIS. but at the time the OSS was charged with the Nuremberg trials and he heard my father was a translator because he was bilingual and it turned out he was more than a translator and before too long at the age of 23 he was named chief interpreter of the American prosecution of the Nuremberg trials and then if you want to call it an honor given the honor of working being the exclusive translator for Herman

Starting point is 00:06:16 Gary. And my father spent many days in the fall of 1945 with Garing, who admitted to my father certain crimes. The most important was that the whole beginning of Hitler's rise to power was when the Reichstag was burned down and Hitler accused the communists of doing it. And Garing admitted to my father that he had burned down the Reichstag on Hitler's orders. And that's what allowed Hindenberg to give Hitler dictatorial powers and the rest is history. Anyway, he came home. He hadn't gone to high school, but Johns Hopkins led him in, graduated in three years, and then became an engineer at RCA and invented the final 17 patents that today brings us

Starting point is 00:07:00 color TV. I could go on and on and on, but those two sets of facts of loan should give you a sense of what it meant to be growing up with this John. intellect, who still was sometimes an intolerant German, but an amazing figure from whom I'm eternally grateful that I was his son. Given that last point about him not finishing high school, but then obviously going to college and being very successful there, what impression did that give you as far as formal education goes?

Starting point is 00:07:32 And I'm curious how you look at formal education, given, you know, what you're doing today. You, I believe, dropped out of three schools. And you got your bachelor's and master's finally from the most prestigious. school probably ever, right, MIT. That is a very unusual journey. I'm just kind of curious what you think about formal education and how it correlates the success, if at all. I was just at the annual Tiger 21 conference and organization I founded 23 and a half years ago. And it consists of today 1220 of the most successful entrepreneurs around the world. You'd have to be one in 10,000 by accomplishment. And so I've sat at the table with some of the

Starting point is 00:08:10 world's leading entrepreneurs and wondered the very same question because many of our members have master's degrees and many of our members never went to college. And the one thing that I'm sure of is that there are many incredibly intelligent people who never had a formal education. And the absence of a formal education doesn't prevent them from creating great success. Of course, you have the Steve Jobs and Bill Gates models who both dropped out of college. So there's plenty of evidence that college isn't an absolute requirement for success. But on the other hand, that doesn't mean that a college education is without value. And having dropped out of Andover when I was in 10th grade and then going to college and starting at the University of Michigan and dropping out when I was

Starting point is 00:09:03 just turned 17. I went a year early. It was too early. I ultimately, went back to MIT. And interestingly enough, what MIT did, just as one example, I took a course in law in the Sloan School. It's just an introductory course to law. If you didn't go to college, you wouldn't have had a broad education. Well, that course in law sparked an interest for me that was a lifelong interest that gave me an edge in almost every negotiation in trying to understand and not just the legal framework, but also how governments work, the role of the Fed, any one of these data points you can acquire on your own. And one of my closest friends never went to college and he's the best red person on the brain

Starting point is 00:09:52 that I know. But when you go to a good college and get a good education, it gives you a rounding that pays dividends for the rest of your life. Another interesting thing happened around age 17, I believe, were you had this brilliant idea, and I don't believe you were able to execute on it until your early 20s, but talk to us about creating a $25 million real estate deal from scratch that ultimately turned into the most successful real estate deal of all time. Well, I don't know if it was all time, but it was pretty good and it was one of the most

Starting point is 00:10:24 successful in New York metropolitan history. My wife's family was in the real estate business, but they were not developers. They had a proven formula of buying buildings and management. managing them and making them as efficient as possible. But they didn't have construction teams and development teams to either redevelop buildings or build them from scratch. And one of the buildings that they had acquired in 1955 was a building that had been the largest building in the world when it was built in 1929 called the Harborside Terminal. and this was an intermodal freight terminal that was the Northeast Distribution Center for the Pennsylvania Railroad, and rail cars of goods and products would come from the west to the Jersey Shore and get loaded onto ships at this facility. The rail cars went right out to the piers and went from the rail car onto the ships.

Starting point is 00:11:24 There were 136 truck docks, and the building was eight stories high. But the elevators were so big that when we were renovating, you could drive a small panel truck right onto the elevator and take it right up to the floor. And the building was forced to be divested from the Pennsylvania Railroad by the antitrust laws that made the argument that the railroads were unfairly competing with local landlords by giving away space for free to generate rail traffic. and that meant the local landlords couldn't compete with the railroads to get tenants. And this was in the days of what was called the Sherman Antitrust, Sherman Clayton Antitrust Law. So Pennsylvania Railroad had to divest of this, what by then had become a white elephant. And my father-in-law and his brother bought it for $5 million, which was an awful lot of money, but it was a two and a half million foot facility.

Starting point is 00:12:25 I'm hard to imagine you could buy a major building for two and a half dollars a foot. And they ran it as an industrial building because that was their business. They were not converters. They didn't buy buildings that had one use and convert them to another. And when I came along at age 17, he gave me a job in the warehouse in the building. And I was then into transcendental meditation. And the pier, the building is right on the Jersey Shore across from what was then the recently completed World Trade Centers.

Starting point is 00:12:55 And if you walk out on the pier a thousand feet, it feels like you're closer to lower Manhattan than you are to the Jersey shore behind you. It's about 3,000 feet across the Hudson and you were a thousand feet out just by going to the end of the pier. And I had this idea that lower Manhattan was expanding rapidly because of the growth of new computer centers and the big firms were going to suburbia and creating these campuses. But people who went to those campuses felt they were going to Siberia. It was too far from the mothership. And I had this idea that maybe lower Manhattan could move 3,000 feet to the west to this building that was ideal because the floor loads were enough to hold the computer centers and the ceiling heights

Starting point is 00:13:41 were enough to accommodate all the air conditioning ducts and the raised floors. And the particular location was such that I ultimately was able to engineer complete power redundancy from two different directions and microwave transmission from lower Manhattan. But I began just having this idea as I was meditating each day at the end of the pier, looking backwards and seeing this building and looking forwards and seeing lower Manhattan. I went off to college. I dropped out of the University of Michigan, but went off to MIT and then got a master's degree at MIT. And then I went to Goldman Sachs where I worked in the real estate department and had a bit of a taste for institutional real estate. But after a year, it wasn't for me and I left and went to work from

Starting point is 00:14:28 my father-in-law for three years as I hatched the plans for this renovation. And it was my great fortune that he and his brother didn't want to renovate. And as a result, I was able to acquire it with a partner who changed my life the day he walked into my office. And in those days, We did acquire it for $25,000, $200,000. But for one reason or another, we were able to put up $200,000 and have loans of $25 million. And fortunately, my partner had the $200,000 and I didn't, and that's how it all began. You mentioned meditation, and it got me curious. Ray Dolly said that attributes most of his success to meditation.

Starting point is 00:15:13 Are you still meditating? What are your thoughts on meditation just from that experience? Yeah. So I meditated using what was then called TM or Transcendental Meditation for a few years then. And then I largely abandoned the practice for a couple decades. And then a little over a decade ago, I began a much different or a little bit of a different practice. Today I meditate for about 45 minutes a day, generally at four or five in the morning when I wake up in the middle of the night, you can't go back to sleep. I've been on a couple of, silent retreats, one a 10-day meditation, silent retreat, and one a five-day, those are pretty unique experiences. And there's slight differences between TM, where they give you what's called a mantra, and everybody supposedly has a private mantra, and Shavasana breathing where you're listening to your breath, the flow in and out to concentrate your mind. And then there's a concept of an observing mind, even as we're having this conversation.

Starting point is 00:16:17 If I'm on my game, I'm also observing what's going on in the conversation. And sometimes when you feel an emotion and you can see it, you can dissipate it. If you go into a room and for some reason you're feeling insecure because of something about you or something about the rest of the people, if you see yourself being insecure, the insecurity seems to fade away or angry or jealous. These are all common human emotions or just anxious or, you know, there's lots of ways that one can observe themselves and moderate behavior that's counterproductive. But I do believe that my life is immeasurably better for the meditation. I also am a believer in analysis. Some people think of analysis through some

Starting point is 00:17:10 term. It's a gift that you give to yourself to explore your inner mind. And because I've been doing both for over a decade, I guess now probably 15 years, it's very hard to figure out what part of my personal evolution came from the meditation or came from the analysis because there are both ways to access parts of your brain or your mind that are more difficult to access if you're not mindful about it. Analysis is an attempt to explore the unconscious. There's a model of our mind. There's the part of the mind that exists on the surface of every day. And there's a part of the mind that's hidden from us, except when things seep out and almost surprise us. Where did that reaction come from? Where did that idea come from? In the world of finance, you have a whole thing called behavioral

Starting point is 00:18:06 finance. And Danny Kahneman and Tversky, his partner who passed away, wrote a book called Thinking Fast and It's Slow. And although it's not exactly the same, it really shows how your brain functions on multiple levels because it's evolved that way to optimize the way we function in the world that existed or exists. We don't live in the nature anymore. But if a tiger walks behind the trees and you just see a little brown spot walking, your brain is attuned to seeing that and reacting to protect yourself. Unfortunately, if you read the stats on climate change and it's a slow moving disaster over a generation, our brains really don't know how to deal with that.

Starting point is 00:18:55 It's one of the natures. But to go back to analysis, basically analysis is a different way to access what's going on. And you can do it. You need to do it generally for three times a week with an analyst, who's the psychiatrist, who's gone on to train as an analyst. There's Freudian analysis and other forms as well. Freud was the father of it. But, you know, a simple example is I was listening a few years ago to my brain, if you will, and what popped into it was an experience I had when I was 11 or 12 years old where my parents had a fight. And I hadn't really remembered in 50 years that event. And I had to wonder, why had I hidden that event? Why was it sublimated? Why did it

Starting point is 00:19:44 disappear? And what did it mean that it came to the fore now? And sometimes when you realize who you are, your childhood is like a record groove on the old records where you had a needle in those grooves and your childhood sort of imprints. And sometimes when you can see your behavior today as a product of your childhood, it's another form of attenuating or taking control of behavior that up until then you weren't sure what was driving you. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord and every conversation you have is with people who are actually shaping the future.

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Starting point is 00:24:32 and cover for a minute here. First of all, Tiger 21 is an acronym. So maybe walk us through the acronym and then why you founded this enterprise now. And I'd like to kind of talk about the dynamics that play out in these groups because I'm sure it's a form of analysis to some degree. Sure. Tiger is an acronym for the investment group for enhanced results in the 21st century. Tiger is a organization of today 1224 entrepreneurs who meet in groups of 12 to 15 people every

Starting point is 00:25:03 month for a full day to focus primarily on the experience that a successful entrepreneur goes through when they sell their business that they might have owned for 20 or 30 years and immediately go from a wealth creator at least temporarily to a wealth preserver. And the amazing thing is most entrepreneurs don't know so much about investing and they further are fooled by the fact that their successes, their success as an entrepreneur, they assume will assure their success as an investor. And as they say, it just ain't so. And all of a sudden there's often a rude wake-up call.

Starting point is 00:25:41 How could I know so little about investing when I've been such a successful entrepreneur? And we create an environment where people learn about all of the things that that transition occurs. I mentioned this large development that I had done in my 20s. I sold it when I was 31. I was more successful pretty much than any peer of mine and maybe successful beyond any dream that I had had. But then I had a second go at starting new businesses and I didn't want to stay in real estate because I was being overshadowed by my father-in-law and I wanted my own identity. And so I went into the real estate information business. And for those of your listeners who might have gone to Zillow to look up the price of a house, I essentially created an industrial

Starting point is 00:26:29 form of Zillow before the internet was created. So obviously very different functionality. But the idea was to find a way to track real estate prices across different property types, which had lots of uses, among which was, if you were buying a property, was this a good or a bad price and potentially to trade commodity indexes against the prices of different real estate categories or to arbitrage what an industrial property in New York might be worth versus an industrial property in California, just to use an example. But in my entrepreneurial zeal, you said, I think you were touching before and what it was like to be 31 and have achieved that level of financial success. There's nothing more dangerous than a 31 year old who thinks he can do no wrong. And when you've had that

Starting point is 00:27:23 level of success, it's hard not to think you can do no wrong. And so fortunately, I did a couple of things that didn't imperil all that I had made, but set me back enough to realize that I wasn't as infallible as I thought the day that I sold Harborside. And actually, you know, as a rule for hiring people, unless they've had a bit of failure, I tend to be less interested in them because obviously you want success in somebody's background. But without the failure, they don't begin to test their own limits and they don't begin to learn what their strengths and their weaknesses are. And they never master how to make up for their weaknesses either by associating with other

Starting point is 00:28:09 people are staying away from the things that they're least good at and focusing on the things that they're best at. So I had a tough couple years after this incredible success where it felt like I was going backwards. And one day, about five years after I sold Harborside, I was involved in a business where I'd made an acquisition that turned out, I don't know that there was fraud, but I certainly miscalculated what the potential of that acquired business was. And had a real legal hassle with the guy who I bought the business from who I thought had misrepresented the business. And I realized, I woke up one night and said, boy, if these 10 different things happen in the things I'm involved with, I could lose most of what I made. And it scared the

Starting point is 00:28:59 bejesus out of me. I just couldn't, I couldn't believe how that could be. The chance of all 10 things happening was very small. But the fact that I could even construct a series of improbable events that would set me back told me I was doing something wrong. And I decided to crawl back, if you will, to the real estate space, which I guess I have some more natural expertise or instinct for, notwithstanding. I also got a huge benefit from the fact that my wife's family was in real estate and I'd been at the real estate department at Goldman Sachs and so forth. And I started, And I started then a company to acquire distressed portfolios. And over the next seven years, built that up to about a billion dollars in assets.

Starting point is 00:29:44 My partners generated about a 38% IRA, which even today is a good number. And we acquired about 200 properties distressed, some through the debt, some through ownership. And I put together a team that could rehab, re-market, reposition, resell, anything with the word RE in front of it to transform a property from what we took control of to turn it into something vastly

Starting point is 00:30:14 more valuable. And that company which was called MS, E M-M-E-S, was a play on my initials, M-S. And it also means truth in Hebrew. MS means truth in Hebrew. I was very sorry to see that name go. Most entrepreneurs get very attached

Starting point is 00:30:30 to the names of their businesses and it breaks their heart when they have to let them go. But after seven years, I built that business up to, as I mentioned, about a billion dollars. And an opportunity came where my junior partners wanted an institutional partner to buy half of the business. And I realized that really what was going on is one of my partners thought that if we brought in an institutional partner, he would be closer to that institutional partner than I would be. And so his minority interest plus the institutional partner's interests would control the business. And I didn't have any interest in being a minority partner in

Starting point is 00:31:09 the business. But I said, look, if you want to bring in a partner to buy 50% of the business, why didn't they just buy my interest? I think at that point I owned more than 50%. And I'll go quietly into the night. I think I was about 43 at that point. And what was interesting was if I hadn't sold Harborside when I was 31 and it changed my life for the better. I might not have had the courage to do that second sale because the business had a lot of room to grow and the problems weren't enough. But it just seemed like I had a second opportunity in my life to start all over again. And I'm somebody who likes to be part of the act of creation. So I took that opportunity and sold.

Starting point is 00:31:55 And that's when I started Tiger 21. I want to touch on that piece of failure you brought up because I find that so interesting. I was reading about how Sarah Blakely as a kid would sit at the dinner table and every Friday, I believe, her father would say, what did you fail at this week? You know, and he'd be disappointed if she didn't have something to bring up her and her brother. And similarly, you know, I watched this SpaceX launch recently and it was a successful launch. It went up in the air, but it came down and blew up. But the team was celebrating like, this is a successful launch. And, you know, you hear this phrase, fail fast, fail off and fail cheaply, baby.

Starting point is 00:32:27 How have you adopted this lesson? I know you're a parent as well. I'm curious, is this sense of failure and this lesson of leveraging learnings become a practice that you somehow instill in people around you, your employees and or your family? You know, I was just at a meeting of the Tiger 21 Family Office Group where some of our members who have higher amounts of wealth and have created family offices come together to talk about mostly issues of legacy and children. And one of the members was saying that his daughter didn't make it on to the soccer team.

Starting point is 00:33:04 And it was kind of shocked because she's grown up in some privilege. And she assumed she would get that. And the father hates the fact that any of his kids would think that they were so privileged. And she said, Dad, I didn't get on the team. And he said, well, honey, I guess you weren't qualified. And it was a real shocker. He said, if you want to get on that team, you just got to work a little harder. You know, they'll let you on when you're ready to get on, but not before.

Starting point is 00:33:30 It was really a beautiful kind of statement because I can't tell you how many other parents would say, oh, well, that coach doesn't know what he's doing and I'm going to take care of him. I'm going to call the principal, I'm going to do something to make it right for you, baby. And that's not the right way to do it. You know, you want kids to be on their own. You want them to fail. They want to understand that not always, but sometimes their failure is a reflection of their own shortcomings. and if they want to, if they want to win, they need to correct or work harder or be smarter or not

Starting point is 00:34:04 be so lazy or, you know, do something. And if you don't make that connection for them, they expect the world to come to them. And that's just no way to live. But I feel that, you know, this notion that everything is the best, the way the world works out as a wonderful way. Because we all try and make the best of whatever hand were dealt. And of course, I feel like I was dealt a very lucky hand. Many of us are, but that failure in those five years, or at the end of the five years, was the best thing that ever happened to me. And, you know, frankly, a few years later, in 2007, I was diagnosed with cancer, a form of non-Hodgkins lymphoma. And oddly enough, it was a great experience. It sounds crazy to say that. Obviously, if you'd

Starting point is 00:34:53 die from it, it's not a good experience. But for me, it was another kind of wake-up call to take a step back. And in my case, it gave me six months to step off the merry ground while I was in treatment and think about what I had been doing. And I kind of decided that I wanted to marry philanthropy and business in a different way, particular to me, I wasn't making a judgment about anybody else. And that's when I sort of coined the phrase, all climate all the time. which is what my passion is, and tried to think about ways to marry philanthropy and business. I owned a solar lighting business at the time, and we started installing lights. The earthquake in 80 happened a little while later, and we installed lights at our own expense, sent our own team down

Starting point is 00:35:42 and lit up the emergency feeding stations and the emergency medical stations. And we were the first people on the ground, and I never realized that light could be so life-saving. But the interesting thing is, you know, the road to hell is paved with good intention. I told our team, you can only go into Haiti if you bring somebody who's from the military, who's killed somebody in action. And they thought that was crazy. And they said, why would you do that? I said, well, in the 90s, I led peacekeeping inspection teams to 28 war zones around the world as part of my international activities, maybe following in my father's footsteps. And I went to 28 war zones. We were shot at, held up, whatever. And we were in the killing fields of Cambodia. And one of our members almost lost their hand

Starting point is 00:36:30 when they were given a grenade that was supposed to have been deactivated, but there was still gunpowder in the cap. And he was a pianist. And I thought all hell was going to break loose. But my point is that life has these twists and turns. And so that was an interesting period. Sounds like a very interesting period. I know that you are a big proponent of learning from others' experiences as much as possible. Certainly, that's a huge, I think, pinnacle of Tiger in and of itself. Have you found any lessons from those groups or from your group specifically that helped

Starting point is 00:37:04 you avoid a mistake of your own? For instance, I know that you're not keen on using debt or leverage in your own personal finances and investing. I'm curious if that's more of a mathematical choice or from a cautionary tale from you or others. So yesterday, we had a young member in one of the groups describing his net worth and asking the group what they thought he could afford to pay for a house. That's a common question. You create a fair amount of wealth and you're not quite sure. You know, we've been tracking these statistics. So I can tell you what the asset allocation is of the hundred,

Starting point is 00:37:40 $135 billion that aggregates all of Tiger. And I can also give you a sense of some issues about living expenses, but he was new to the game. And he just had no reference point whether he could pay X or 10x and be prudent about buying a house, particularly in California, where the numbers are so crazy. And one of the other members said, well, you know, if you pay, I'm just making a number up $10 million and you lever it with $5 million, all you have to do is worry about the $5 million you have to come up with. And I said, really? You would put debt on a house?

Starting point is 00:38:17 I'm pretty sure that I'm anecdotally accurate that a majority of Tiger members have no debt. The greatest luxury of the wealth they have is never to have to worry about the corrosive effect of debt. could have a long debate whether because there's a certain level of tax deductibility and you can get debt, particularly in the last couple of years, you could get such cheap debt that the arbitrage if you had any kind of income producing assets was clear. So it's not a financial argument. I understand financially if you borrow money at 4% and your average return is 11%, you do all the math. It makes a lot of sense. But we once had a member whose father not only had a 100%

Starting point is 00:39:04 of his assets in one fund, but it was such a fantastic fund that he literally mortgaged his apartment, one of the top apartment buildings in New York, because the cost of the mortgage was a lot less than he was earning on that Madoff investment. And when Madoff blew up, they lost everything. And that person had been in Tiger and done what is called his portfolio defense. And most of the people who never heard of Madoff said, we don't know who Madoff is. But after you make your money, when you're investing it, you have to have some kind of prudent diversification. And while we would say 10% is the most you should put in any one investment, even if you had 20%, maybe that's understandable, but 70% is crazy. And he quit the group and

Starting point is 00:39:50 said, I really have nothing to learn from you. And a month later, Madoff blew up. And I was very sorry for him, but it was just, you know, you have these disciplines. So of course, you know, if you're worth any number you want to pick 10 million or 100 million and you have a mortgage that's 2% or 5% of your net worth, it's obviously not particularly stressful. But psychologically, I have no debt and I love the fact that I don't. And I think most of our members feel that one of the luxuries, and in some sense it is a luxury, is to avoid all of the problems that debt could possibly create. That's a kind of learning from a group that we would have. It's fascinating. You mentioned earlier that just because you were a great entrepreneur doesn't

Starting point is 00:40:36 make you a great investor. And I'm reminded of that classic Buffett quote, right? I'm a better investor because I'm a businessman, better business fan because I'm an investor. They seem to be self-reinforcing, at least for him. I've adopted that philosophy for myself with my own business thinking, okay, I'm the capital allocator of this company. Every decision I'm making is an investment, whether it's hiring, whether it's marketing spend, what have you. I'm looking at everything like it's an investment. So I'm kind of curious where that breaks down. down, right? Because you're building a business and when you go into actual investments, where is the disconnect? You know, there's so many different ways to look at this, but I'm not sure that Warren Buffett is

Starting point is 00:41:13 an investor when he's negotiating specialized deals. He's a kind of financial entrepreneur. It's a distinction maybe without a difference. But what I know is the following. None of our members are Warren Buffett. And most of our members made their money building a single business and milking it for all it was worth for 10 or 20 or 30 years. And while they had had their nose to the grindstone in that single business, most of their capital was tied up in the business as well. So that when they sell the business, they get a huge pile of capital. Doesn't matter how many zeros are attached to it. Could be 10 million could be 100 million could be a billion. But when they sell their business, they lose the platform that the business provided them. And they lose the automatic earning capacity

Starting point is 00:42:07 or the built-in earning capacity that that business add. And now they're at the mercy of markets. When they were the owner of a business, they were the king of a little pond. They were the master of some small corner of the universe. But once you convert that into money and you become an investor, you have no natural advantage. Maybe you have some advantage in investing in asset types like the asset that you worked on. So if you were a real estate developer, maybe that gives you an edge as a real estate investor. But by and large, entrepreneurs make their money concentrating on a single opportunity and investors have to diversify. In that sense, Warren Buffett was never an entrepreneur. He was always an investor, maybe the best investor in history, but he was really an

Starting point is 00:42:56 investor from day one. Entrepreneurs are action junkies. Every day they come in and they say, what can I do to make my business better? And for them, investing is watching the paint dry. So they almost always move too quickly to do something instead of letting investments like a wine, savor over time. And, you know, there's just a lot of other differences between an investor and an entrepreneur. The most important thing is over concentration and a lack of understanding of risk. What happens when you're an entrepreneur is very often your success comes in an area that you have some kind of innate or natural sweet spot. It just works for your personality. And you don't really know it. It's like the classic example of the fish who doesn't

Starting point is 00:43:46 know what water is. He's been swimming it at its whole life, but he doesn't realize he's actually in water. And for many entrepreneurs who are successful, they're like the fish swimming in water and not realizing exactly why they've been successful. And then when they lose the platform and now have to go head to head with the world's best investors, they don't have a chance. They're like cannon fodder. So the real moniker for Tiger 21 should be we take some of the world's greatest entrepreneurs and turn them into mediocre investors. If we didn't, they'd be some of the world's worst investors just by their natural inclination. So of course, that's not what we aspire to, but the point is that so many investors have a dramatic comeuppance about the world after

Starting point is 00:44:33 being an entrepreneur. And if we're helping them become a new entrepreneur or a better investor or to clean up their legacy or their personal relations or their family relation, this is a space where they can explore all of those things. So it's both on the deal side and on the personal side. That last point is really interesting. It's reminding me of that quote that's thrown around a lot. That's when investing, right? Don't just stand there, do nothing. And that might be the hardest thing for an entrepreneur to do, so I totally understand that point. Very, very interesting. There are other groups out there similarly like Vistage and I know some others. I've actually personally been a Vistage member for four years now, building my business. And I understand the deep

Starting point is 00:45:15 work that goes into those groups and those efforts. I know that you were actually a Vistage member before Tiger 21. So I'm curious what you took away from your experience there, what you adopted, what you left behind to kind of help set the stage for Tiger 21. Well, first of all, the two great CEO groups globally are Vistage and YPO. And it's kind of remarkable. Both of them have as their members CEOs, but YPO tries to get you before you're 40. And there's a higher percentage of under 40 CEOs who are running inherited businesses. And I have absolutely no problem with that. But obviously, the journey somebody goes on to inherit a business is very different than somebody who takes a nickel and rubs it with a dime and creates a large business. But both members of YPO

Starting point is 00:46:07 and Vistage have the responsibility to run a business. Those organizations focus on running businesses. And amazingly enough, they're both 80 years old and they both have something like 30,000 members. It's remarkable because one is a non-profit YPO and one is a for-profit Vistage and they're both great organization. I think the best way to understand Tiger 21 is those are the great colleges, the Oxford's and Cambridgees and we're the great graduate school. When you sell your business, you graduate from YPO to Tiger 21. It's kind of remarkable. I only have the highest phrase for both of those organizations. We don't see ourselves as competitive. We see ourselves as compatible and they're both fantastic.

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Starting point is 00:50:04 and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Back to your point about analysis, my relationship with Vistage has always been this kind of love-hate relationship. And that's because it's, for one, it's hard to carve out time away from work, right? But also, it is deep work and personally and professionally, which can be exhausting. So just like working out with a trainer, I always kind of dread going, but then I'm so happy when I leave afterwards.

Starting point is 00:50:37 Have you experienced something similar to that with Tiger? The group dynamics different. I know that it's more practical. Yeah. Probably the most unique aspect of Tiger is something called the Port-Four. Defence. Their financial statements and a 20-page analysis of the purpose of wealth, what is legacy? If there was a downturn in the market, what are your goals, how do you define family, what is the purpose of this wealth, what are your philanthropic goals? And very often it

Starting point is 00:51:05 takes about a month to prepare the first portfolio defense. And the reason I called it a defense was like when you get a PhD at a university and you defend your thesis. This is an opportunity among 12 economic peers to defend, do I have enough cash? Am I over concentrated? Is my estate in order? Do I have enough insurance? Have I thought about how this will impact my kids and endless other questions? And we exist within a world of peer-to-peer learning.

Starting point is 00:51:38 the essence of what we do stems with the belief that the learning comes from your peers who collectively see things that you can't see on your own. They see your blind spots. And the portfolio defense is nerve-wracking for many people there. Literally, we've had people leave before their first portfolio defense. Most people think that once they get through that gauntlet, that's what it feels like. It's been the most incredible experience that they've had. And they look forward to a year after year because it's the one time in a year where you can get an unvarnished feedback from people you respect. And for many of our members, they've never shared this information with a spouse, with a friend. They can't talk about it at their country club. They haven't even shared it with

Starting point is 00:52:25 their lawyers or their accountants. Each of those people know a piece of the puzzle, but we try and put the whole picture together. And it's an amazingly transformative experience. And much like the one you're describing lots of anxiety before and lots of pleasure after. What are some personality traits or other things that have come out of the surveys? For instance, I'm curious to know if anyone feels like they have actually achieved enough, right? Being an entrepreneur, you always want to strive for more. Is that a possibility or is it an inherent property of just being a human being or

Starting point is 00:52:59 an entrepreneur that we constantly think we need more? First of all, there's lots of studies that show that once you, achieve $75,000 a year of income, which, you know, for most people would cover kind of basics, very basics. Virtually everybody else thinks if they could only have 20% more, they'd be satisfied. It doesn't matter whether they have a million, 10 million, 100 million, or a billion. Obviously, you have outliers. But when you asked the question, I was thinking, like, what would happen if you put a thoroughbred who just won the preakness in a pen that's 20 feet long? You know, he'd be itching to run wild.

Starting point is 00:53:40 Many of our members, it's not the money. It's, in my case, I'm fine on the money. I love being part of an act of creativity. If I end one thing, I want to start another. Some of our members want to change the world. Some of them started a business because they just thought they could make a difference. You know, many entrepreneurs in the nonprofit world exhibit much of the same characteristics. of saying, I can do this. I grew up. Maybe people had a low expectation, and I want to prove to them that I can make a

Starting point is 00:54:15 difference or I can do X or I can do Y. You know, you have these amazing outliers. I have no particular insight into the Elon Musk's or the Steve Jobs of the world. But I know if they've gone through a transformation, thinking about a word called retirement, that word doesn't exist anymore, largely. There's a better word called rewirement. I didn't create it, but I like the word. The nature of our frictionless economy, internet, and so forth, allows wealth to be created much earlier in life. People are creating wealth younger. And obviously, when they're creating wealth younger, they have more energy to create something else, whether it's a for-profit or a nonprofit, very small fraction of them care about making much more money. They're much more interested in legacy

Starting point is 00:55:01 and impact. And sometimes the impact is on their family. Sometimes their impact is philanthropic. But we don't hear a lot of discussions about just raw ambition to make more. I know you also survey the members about asset allocation and other things. And real estate has been a long time top performing or top choice, I guess, for an asset across the board. But that's now declined. No more. That's now declined. Is that just because interest rates are going up? I mean, what is driving the outperformance with some of the other assets now in the groups? What's the mentality going into that that's deprioritizing real estate? So we're in a moment that's remarkable, truly remarkable.

Starting point is 00:55:42 Something happened this month. We're obviously in February of 2023. Something happened in this month that literally has never happened in the 15 years we've been recording this data. Over the last few months, a majority of our members think that we're going into recession. And a majority of those members think it'll be a significant recession. And yet as of the fourth quarter, our members were more highly invested in their portfolios than ever before. And even more remarkably, private equity zoomed from 23 to 31 percent of our portfolios. Private equity had been 10 percent only 15 years ago. So it's the biggest shift out there. And real estate had been,

Starting point is 00:56:28 King for 15 years, covered between 28 and 32 percent, and in the last year it's fallen to 23 percent. And public equity is obviously the other one of the big three. In the last year, fell from 28 to 23, which just reflects the downturn in the public markets over that period. But we've had what would be called rotational or sector shift with private equity for the first time zooming to the top and real estate falling back. And it was interesting. We're just finishing our 12th annual conference where we have some of the top people in every industry. And one of our speakers, you know his name. And I'd say he's probably one of the five largest real estate owners in the world, said that the question was, if I had $10 million, what would you invest it in?

Starting point is 00:57:16 He said, well, I wouldn't invest it in real estate. I think the prices are too high. They have to come down. We're still pretending that interest rates are as low as they've been for the last decade, but they haven't been. And so real estate looks like it's coming down just a bit. But as anybody who's been in real estate can tell you, a deal of a lifetime comes across your desk every week. And it doesn't matter whether it's good times or bad. If you do a great deal and they're always out there, you can do well. Talk to us a little bit about Michael Sondefeld's views on the markets and how you think they're going to perform. There's all these mixed signals, as you just mentioned, going into this year. But how are you viewing things?

Starting point is 00:57:58 So the place where I'm most involved is in climate investing because I believe it's the single biggest investment theme in the history of humanity. We're going to rewire the entire utility network so that it can become electric and replace fossil fuels. We don't have any choice but to do that. And the totality of the electric conversion and elimination of fossil fuels will be about $2 to $3 trillion a year for the next decade. So by any stretch, it's the largest investment theme. The markets, even with how great oil and gas did in the last year, the markets have spelled the end of fossil fuels. Fossil fuels in 1980 or 90 were 28 or 29 percent of the market cap. And I think today they're close to 5 percent. And if you believe in stranded assets, it'll be even worse.

Starting point is 00:58:53 We just have to get the carbon out of the atmosphere or none of our children or grandchildren will inherit the life that we would like. So climate investing, I'm particularly interested in VC climate investing, where I focus is on late seed and early A because there's too much big money in the later stages. But I think we can make a difference. So I run a team called the Muse Climate Partners and we have about 30 VC investments under our belt that are just doing amazing across the entire spectrum. But in terms of interest rates coming out of the conference that I mentioned, I think interest rates likely are not going to accelerate. I think it's obviously been a bad route in the last year, but maybe, I don't know if we've topped out, but I think the growth will slow. and maybe top out. One of the ways I look at it is labor prices still tight. But if you look at so many other areas, you know, you couldn't buy a used car a year ago. Now you can't spell one

Starting point is 00:59:58 a year ago. You couldn't ship something because the ships were all filled and the shipping rates had gone up 10x. They've all fallen back. So a lot of those supply chain issues that were a result of the pandemic have resolved themselves. And I think some of the inflation was a result of what was called the bullwhip effect after the pandemic where inventories were low and then people started stacking stacking up again. But these are really complicated time. And let's not forget, the war in Ukraine has turned the world upside down, not just because it turned energy prices. It was the greatest gift that energy owners had. And if you think about Russia, Russia might have invaded Ukraine just for its financial impact on Russia's fossil fuel.

Starting point is 01:00:45 assets. They've made fortunes of money. And I suspect the war has cost less than the increase in value in their oil and gas assets. But, you know, we have the potential of Taiwan. I wouldn't minimize that inflation, climate, and political instability. And all of these things are creating a witch's brew of black swans to mix a metaphor that we've never had before. What Tiger members, I think, are saying is, despite all of that, people need to wear clothes. They need to eat. They need to turn on their lights. When they get in the car, they need to be able to move from point A to point B. There's a lot of basic things that are amazing bets and good time and bad.

Starting point is 01:01:27 And frankly, if you cure cancer, whether it's good time or bad, you'll do well. And if you create a new energy source, that's fossil fuel free and is cheaper than any other energy source. That's going to do well. So there's just endless categories of potential. And we're both in an age of kind of unlimited entrepreneurial potential bounded by the realities that polarization and these other challenges are creating. Now, I asked this question to Jeremy Grantham recently, who was also a very focused on climate and VC specifically. Yeah, he's fantastic. I'm curious what you are seeing that's giving you the most optimism around climate, what new technology or,

Starting point is 01:02:13 what advancements you've invested in or seen that you're most optimistic about? So I'm the vice chairman of, or co-chairman of something called the Climate Pathways Project at MIT. That is where we house something called the Enroads Climate Simulator. It's the, what I believe is one of the most advanced visual simulators of climate over a hundred year period and you put in these 18 policy levers, you can move any lever any way, you know, gas prices, oil prices, taxes, regulations, electronic cars, a forestation, deforestation, and we could go through it. But you look at all the major policy areas. And the fact is, we know the science. This isn't any more debate. Yes, there's some wacko

Starting point is 01:03:07 cooks, and I'll just call it that, who are in denial. And it's not just the majority, virtually, the science is virtually settled. That climate is man-made, and it is going to threaten our way of life if we don't cut back on the production of fossil fuel CO2. And obviously, CO2 is not the only, carbon dioxide is not the only pollutant. You have methane and a whole bunch of others as well. But one thing that's very optimistic is we know how to solve the problem. And by the way, there are many routes to solving the problem. The flip side is, will we have the political will to solve the problem? But the point that I make is it's not only as the science settled and not only do we know how to solve the problem,

Starting point is 01:03:57 we don't need a single new technology invented to solve the problem. We need policies. If there was any one policy, it would be a clear. climate, carbon tax. There's lots of words for carbon tax. It's carbon fee, carbon dividend. But anytime you put a price on carbon, you know, every time I turn on a light switch, I think, you know, if this costs twice as much, I turn it off sooner. And every time I'm on the road and I see some of these, you know, huge gas guzzling vehicles zooming by me at 80 miles an hour, I say, I'm in a Tesla or an elect EV. I say, you know, if the price of gas was another dollar or two, maybe somebody would

Starting point is 01:04:38 drive a little slower, drive a little smaller car, completely the same quality of life, doesn't reduce your freedom, but it'll save our children. There's so much that would unleash the entrepreneurial genius, both of America and the world, if we put a carbon price, because it would unleash innovation. Unfortunately, carbon price alone probably is only about 30, 40% of the problem, meaning it's a solution would solve only 30 or 40% of the problem because we need to shut the coal plants down and we need to stop cutting down the forests in Brazil, which are the lungs of the planet. But we know how to do it. We don't need any new technology.

Starting point is 01:05:18 The more new technology there is, the easier it'll be. Someday we'll be able to do what's called carbon capture and literally turn on a gadget in a field and it'll suck the carbon out of the air. but that's too expensive right now. And although it'll undoubtedly be used, we know the science, we know what needs to be done, we just need the political will to do it. I agree with you on the science being settled, but I'm curious about this playing devil's advocate. For instance, you mentioned this MIT model where you can pull different levers and forecast. There's this Charlie Munker quote about not letting other people forecast for him because he doesn't like throwing up on his desk.

Starting point is 01:05:56 And it kind of goes back to your point earlier about human beings just not being able to, think long-term compound. And it's kind of that garbage-in, garbage out is what I'm getting to a degree, right? With humans behind the wheel, how do we control for that when we're forecasting out the climate impacts? The fundamental relationship that you have to look at is how many parts per million in our atmosphere is the carbon dioxide. And you can see that it's been going up from 350 parts into the mid-400s as the Earth has been getting hotter. So, We could debate whether one thing or another produces more or less carbon. But if anybody believes they can get in a car and drive down the freeway and the gas tank will fill up instead of empty,

Starting point is 01:06:44 that's a kind of science I don't believe in. So we could debate how fast the gas comes out of the car when you're driving down the freeway, or we can debate how far you can go. Those are legitimate scientific debates. But that's not the same as a debate about whether you can drive. down the freeway and have the gas go up in your tank instead of down. And so when you look at the concentration of carbon in the atmosphere, we can either take the best science that we have, knowing that it's always an approximation, but we can say that if you burn so many gallons of

Starting point is 01:07:18 fuel, it will produce so much pollutant that will raise the parts per million of carbon. And we know that the more carbon in the atmosphere, the hotter the earth will be. And it's just that simple. So whether it'll be 17 years till we get to 2 degrees or 34 years, you and I can debate it. But we can't debate whether burning fossil fuels is good. And we can't debate about whether having less fossil fuels and other pollutants and whether reducing the carbon in the atmosphere will reduce the temperatures that are rising, seas, burning down, if you will, forests, creating these storms and melting Antarctica and the Arctic region. All of that is keyed off of temperature, and the temperature is very clearly a reflection of a very

Starting point is 01:08:10 simple scientific fact. So, happy to debate with you any parameter, any leverage, any intensity, but not whether the simple fact that more fossil fuels raise the parts per million in the atmosphere and get the earth to be hotter. I know that you're now focused on preserving the planet, more so than preserving wealth, if you will, right, at this stage. But I know that Tiger has put out literature around this 2% rule for preserving wealth. Yeah.

Starting point is 01:08:40 I'm kind of curious about that rule at the moment. Inflation, obviously rising, asset prices, rising, wealth gaps, widening. I'm just kind of curious, 2%. Is that enough? Is that number still the rule of thumb? So look, if somebody retires and after tax they have 10 million or 100 million or a billion, the first thing they're going to say is, what can I afford to live on? What's a prudent amount? And the fact is, if you, you know, we believe that the average for our members is 2%.

Starting point is 01:09:13 And so as a first order approximation, if somebody does their portfolio defense, and they're living on 5%, that's going to set off an alarm bell that's different. And you do have people who are going to live on 10% because they haven't thought through the number and they might have a pension, they might have a unique situation. Obviously, if I've locked in some amazing financial asset

Starting point is 01:09:34 that's generating 15% a year for the next 30 years, I don't have to worry about 2%. I can live on 10%. But when you're subject to general market conditions, the perfect example is, you know, most the markets were down 20% percent last year, most investors were down 10, 11 percent, depending on which category. You're not going to not eat. So in a year like last year, if you were living on 2%, now you went down 13 percent

Starting point is 01:10:01 because you had losses and so forth. So if you look out over the long term, 2 percent is simply a number that if my kids had to learn one fact about prudent spending, you can't go wrong spending 2% because even if you made no money, it would take you 50 years to get through it. But the point is that when you look at historic inflation and you look at what it costs to live and taxes, 2% is a number that is prudent. Obviously, there are only a few people in the world who can actually have enough assets that 2% is enough to live on. Because even at $10 million, you know, one of the phenomenons that we have that's amazing, you have a business that, that you're making, I'll just making an example, $3 million a year, and you say, what is that

Starting point is 01:10:50 business worth? Well, typically private businesses go at seven, eight times earning something like that. You might sell it for $20 million. And you sell it for $20 million and then you pay taxes and you're left with $16. Well, if all you can get is 2% on that $16 million, that's $320,000. Your income has just gone down 90%. That's a phenomenon we call sticker shock. And in all Almost every case except high tech or very high margin businesses, the passive earnings you can earn on the proceeds of a sale are less than you were earning when you own the business because you sell it at a multiple that's much lower than the rate of return that you're getting on your investments after the sale. And this is a real sticker shock. you know, if you were making $3 million, you might have been living on a million and giving away $200,000 a year. And now you can't even give away $200,000 a year and be left with anything.

Starting point is 01:11:50 So understanding the sale and the psychology and the shock and what's different is really a critical thing. Well, Michael, I've learned a lot about you and your sales and this group you've built and all the knowledge has come out of it. I'm so happy to have this discussion and I really enjoyed your book. It's so to the point. It's very clear, well-written, impactful. I really enjoyed. I devoured it, honestly.

Starting point is 01:12:13 And so I really love to do this again and catch up with you again. Before I let you go, please tell our audience where they can learn more about you or where they can learn more about Tiger 21. Any other resources you want to share. Tiger 21 is www.w-W-T-E-R-21.com. And there's a wealth of resources for that. And if anybody is interested, it's very clear from the website how to get more involved. And if you're qualified and interested, the website will take you exactly where you need to be.

Starting point is 01:12:44 If you just Google me, I'm, I think I was on CNBC or CNBC and other TV, the 57th time last week. So you can probably Google me. I really appreciate it in the book. Again, it's called Think Bigger and 39 other winning strategies from successful entrepreneurs. It came out a few years ago, I believe. but the lessons here are evergreen. So I really enjoyed it. Michael, thank you again.

Starting point is 01:13:08 My pleasure. Great being with you. All right, everybody. That's all we had for you this week. If you're loving the show, don't forget to follow us on your favorite podcast app. And if you'd be so kind, please leave us a review.

Starting point is 01:13:17 It really helps the show. If you want to reach out directly, you can find me on Twitter at Trey Lockerby. And don't forget to check out all of the amazing resources we've built for you at the Investorspodcast.com. You can also simply Google TIP finance, and it should pop right up. And with that, we'll see you again next time.

Starting point is 01:13:32 Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

Starting point is 01:14:02 Thank you.

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