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At BroStocks we are all about supporting your aspirations. Start a side hustle that could lead to a successful full-time business. Building your portfolio on Robinhood and other brokerage accounts. Maybe investing in that first piece of rental real estate as your first step to growing your net worth.
Tiger 21 is the real-life embodiment of our aspirations. It’s an exclusive investment club of about 750 ultra-wealthy individuals across the globe. The club was founded in 1999 by Michael W. Sonnenfeldt, who perceived that the skills it took for him to build a successful business as an entrepreneur were not the same skills it would take for him to keep and grow his wealth as a top investor.
The idea behind Tiger 21 was to create a peer-to-peer group of like minded individuals who can learn from one another about investments and network about business opportunities. The requirements to join Tiger 21 include at least $10 million in investable assets and a number of additional “qualitative” criteria that are judged by Sonnenfeldt and the other group members.
According to its web site, the Tiger 21 investment club is “designed to be a ‘safe space’ for ultra high-net-worth investors to share investment ideas, discuss family dynamics, philanthropy and build relationships with wealth creators across the globe.”
This all sounds great, but your Robinhood portfolio is quite possibly $9.95 million short of qualifying for Tiger 21 membership at the moment. That’s OK. The good news is that there is still plenty you can learn from Mr. Sonnenfeldt, as the Tiger 21 website is a fantastic resource and he regularly appears on mainstream business media such as Bloomberg and CNBC to discuss the positioning of the membership.
Let’s check out some of the most important lessons below.
Lesson 1: Wealth Creation Requires Taking Risks
While we don’t have precise numbers on the makeup of Tiger 21’s membership, it’s safe to say based on the club’s marketing materials a large majority come from an entrepreneurial background.
This makes sense when you consider one of the key criteria for being accepted into Tiger 21’s membership: a net worth of at least $10 million. While it’s possible to attain that kind of wealth through being a very highly compensated employee and investing extremely wisely over many years, the vast majority of individuals and families with that level of wealth come from successful business ventures.
This connection between high-net-worth (HNW) households and business ownership is borne out by research. The original classic that studied the wealthy, The Millionaire Next Door, noted that a majority of affluent households originated with self-employed business people. A 2017 survey from Fidelity Investments found that 88 percent of millionaires were self-made (i.e. entrepreneurs) while UBS’ 2019 Billionaire’s Report noted that “smart risk taking” was one of three key factors that distinguished the ultra-wealthy from the rest of us.
What does this mean for us aspiring millionaire and billionaires? Without having a remarkable top 1% skill in a highly compensated profession (think Hollywood actor, professional athlete or FAANG engineer), the route to true “FU money” for most of us is through entrepreneurship. This doesn’t mean you need to start the next Amazon or Facebook; but it does mean you need to own a business where you can scale growth and reap the majority of the profits over time.
Owning a successful business also provides the opportunity for a lucrative exit, or selling the business for a multiple. This type of windfall then becomes a healthy net worth that can be preserved and grown through investments, as members of Tiger 21 are now focused on.
Lesson 2: Wealth Preservation Relies on Diversification
The central tenet that Tiger 21 was built upon is that the behaviors that create wealth are not the same that promote keeping wealth.
To make this point more clear, let’s take a look at Tiger 21 members’ aggregate asset allocation. It differs quite dramatically from traditional 60/40 and 80/20 equity and bond allocations most of us non-millionaires might have in our retirement accounts. Part of the differentiation in asset allocations between HNW investors and typical retail investors is a matter of access. Investors with more than $1 million in investable assets are considered “accredited investors,” which opens up a number of different options to them including access to hedge funds, private equity and other exclusive options.
However, a more vital lesson to understand from Tiger 21’s asset allocation is that wealthy investors are first and foremost focused on preserving their wealth, not growing it. This explains the notably lower allocations to the stock market (public equities) and higher allocations to assets such as real estate, private equity and even cash (which we will examine in the next lesson). Wealthy investors do not want to risk a majority of their portfolios in a major drawdown that typically hits the equity markets at least once per decade, whether in the Global Financial Crisis (GFC) or the more recent coronavirus correction.
Many hedge fund strategies, for example, are less focused on “beating the market” annually than simply preserving wealth and keeping up with inflation. This is why you should be suspicious of the typical mainstream personal finance article that beats up on hedge fund performance failing to keep pace with the market. Despite their reputations as high-flying, high-risk vehicles, many hedge funds are focused on conservative strategies that generate a reasonable rate of return over time.
It also appears that Tiger 21 members feel more comfortable with their assets allocated into businesses or specific, customized investment strategies where they feel they have more of an edge or an influence over the outcome.
Lesson 3: Cash is King
In reviewing the asset allocation of Tiger 21’s wealthy members, one asset class stands out: cash. Typical retail investors in the accumulating stage of their investing careers tend to abhor holding cash (especially at today’s pathetic interest rates) as this money can be turned into investments that can achieve higher rates of return in mutual funds, ETFs or individual stocks. However, the wealthy see things differently and adhere to the adage “cash is king.” If you extrapolate an entry level member of Tiger 21 who has a $10 million portfolio, this means this person would be holding more than $1 million in cash.
Wealthy individuals have multiple uses for their higher than average cash piles:
- Investing in unique opportunities such as startups, private placements or individual real estate deals that may come around only so often.
- Holding cash strategically to buy assets at fire sale prices (i.e. The bottom of market downturns when other cash strapped investors are forced to sell at any price.)
- Perhaps most importantly, holding a high level of cash acts as a glorified emergency fund, allowing these investors the peace of mind to never have to sell investments at the wrong time. Many accredited investors access hedge fund and private equity investments that require lock up periods, potentially of many years. Being forced to withdraw money from these investments at the wrong time can be disastrous, so holding above average cash is an insurance policy against such an outcome.
Lesson 4: Social Connections are Valuable Currency
Tiger 21 itself embodies the final lesson: wealthy investors value their networks.
Making connections with similarly wealthy peers provides a never ending resource of opportunities for these individuals. This could be simply a sounding board to learn about new and exclusive investment opportunities. It’s also a chance to discuss challenges that wealthy investors face from guarding their privacy, teaching the next generation about money, and sophisticated tax guidance.
Tiger 21 and organizations like it provide a networked knowledge base that allows the newly wealthy to avoid having to “reinvent the wheel.” This is why Tiger 21 and similar exclusive investment clubs hold such appeal to the wealthy and will likely continue to do so.
You may not aspire to be an ultra wealthy investor and gain access to Tiger 21. However, if you do aspire to true wealth begin heeding some of these lessons now. Seek ways to pursue entrepreneurial ventures, consider the benefits of diversification as you grow your wealth, don’t underestimate the benefits of a healthy pile of cash and find ways to network with like minded individuals.