Fix It Friday Ep. 9 - Rich Yet Reckless: The Surprising Investment Missteps of the Ultra Wealthy

• TIGER 21: A Glimpse into Billionaire Investing - Overview of TIGER 21, an investment group managing $170 billion.
• Behavioral Biases Affecting Billionaire Investors - Ultra-wealthy investors are not immune to common investment biases, often magnified by their resources and confidence.
• Case Studies of Billionaire Investment Missteps - Real-world examples show the dangers of recency bias and overconfidence in investment decisions.
• Human Nature and Investing - Understanding and mitigating biases is crucial for successful investing, regardless of wealth.

Disclaimer: [00:00:00] The following podcast by Fusion Family Wealth, LLC Fusion is intended for general information purposes only. No portion of the podcast serves as the receipt of or is a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Please see additional important disclosure at the end of this podcast.

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www.fusionfamilywealth.com. 

Jonathan Blau: The ultra wealthy investors make the same behavioral mistakes. That the rest of us make, but they do it with two major differences. They do it with a lot more money and a lot more [00:00:30] confidence.

Voiceover: Welcome to the crazy wealthy podcast with your host, Jonathan Blau, whether you're just starting out or are an experienced investor, join Jonathan as he seeks [00:00:45] to illuminate and demystify the complexities of making consistently rational financial decisions under conditions of uncertainty. He'll chat with professionals from the advice world, entrepreneurs, executives, and more to share fresh [00:01:00] perspectives on making sound decisions that maximize your wealth.

And now here's your host.

Jonathan Blau: Welcome everybody to another episode of Fix It Friday. Today, I am [00:01:15] going to talk about, uh, how the billionaires invest. So we're going to give everybody, uh, a bird's eye view into some of the habits. And actual investments, um, that, that the billionaires make. And the way we're going to do that is there's a group called [00:01:30] Tiger 21.

And that acronym stands for the Investment Group for Enhanced Results in the 21st Century. It was founded, uh, uh, a number of decades ago by a gentleman named Michael Sonnenfeld. Uh, and many of the members are billionaires today. They manage about [00:01:45] 170 or so billion of their own money. And many of them made their wealth initially in the real estate business or through other successful entrepreneurial ventures.

And, and became, um, certainly in the top [00:02:00] one, if not one 10th of 1 percent of America's wealth. And Michael Sonnenfeld formed this group way back when, after he had an initial sale, I think in his thirties of a business, he's now, I think in, in his late sixties. Um, and when he was in his thirties, he sold a business [00:02:15] and he apparently invested the proceeds in a way that didn't reflect the outcomes he'd hoped for.

So he figured, let me, let me find a number of successful entrepreneurs like myself, who are similarly situated. We'll put our heads together and somehow we'll become good investors in the [00:02:30] financial markets. And Tiger publishes every quarter, what they, as a group with their 170 or so billion dollars are doing.

So in other words. Uh, not each individual, but as a group, maybe there'd be, there'd be more, uh, in hedge funds or private equity or cash this quarter versus [00:02:45] last and they'll disclose that. So I wrote an article back in 2020 that was published by Barron's and highlighted what I already knew, but was able to prove with Tiger 21's, uh, disclosures, which is that the ultra wealthy investors make the same [00:03:00] behavioral mistakes.

That the rest of us make, but they do it with two major differences. They do it with a lot more money and a lot more confidence. So at the end of the day, uh, what we found is in looking at their, at their work is that, for example, in [00:03:15] 2010, they named their favorite mutual fund. It was a fund called the Fairholme Fund.

And they named it in 2010, uh, because it made about 200 percent for the decade. And, and for that same decade, uh, the S& P 500 was actually down, it [00:03:30] lost money, but this fund made 200 percent for the decade S& P was down. And so like any other human being, they were attracted to the past performance and made the mistake of, um, engaging in what's called recency bias.

We look at. The recent [00:03:45] performance, and then we extrapolate from that recent performance, future predictable trends, which there are none, nothing's predictable, uh, when they don't exist, and then we hop on it and, and that's what they did. And for the next decade, believe it or not, um, the fair home [00:04:00] fund didn't only underperform, it was, um, one of the worst, uh, fund records for a decade.

Ever recorded in history, uh, making about 60 percent for the next decade while the S& P 500 earned 260%. [00:04:15] Similarly, their, their top fund, their top, uh, stock pick in 2010 was Berkshire Hathaway. Everyone knows Warren Buffett and, uh, Berkshire Hathaway became their top stock pick in 2010, just in time for them to, [00:04:30] um, get on board for his, what will become Warren Buffett's worst decade ahead.

Uh, relative to the Standard and Poor's 500 in 2014 and 2015, uh, the group was piling into what were called master limited partnerships. These were [00:04:45] oil and gas limited partnership entities where they promised a high level of income, but they were also. So we learned from that is while all investors engage in herding, like to follow the crowd.

And just as they were piling in in 2014 and 2015, it turned out to be the top of what was an energy industry bubble [00:05:00] and, and they suffered. So we learned from that is while all investors engage in herding, like to follow the crowd. We'd rather be wrong conventionally, meaning wrong with the crowd than right unconventionally standing against the crowd.

And this applies to the billionaires the same way. In fact, maybe even more [00:05:15] so because as they're all very successful entrepreneurs, they're overconfident in their skills and their knowledge relative to others. In fact, um, there was a podcast we recently did. You could look on the Crazy Wealthy Podcast website called the Beware of the Illusion of [00:05:30] Predictive Value.

It deals with the idea that if we have a thought about how some investment or, or event will, will, uh, materialize in terms of the outcome, we think our thought will actually be pretty reflective of the probability that the actual outcome will [00:05:45] reflect our thought. And, and they're, they're particularly sensitive to that bias.

That is, they really believe that their thoughts We'll predict the actual outcomes are likely to happen, uh, because, because of their success in life and in business. Um, and, [00:06:00] and couldn't be farther from the truth. One other, uh, investment mistake that I noticed that the, the investors made was believe it or not.

Uh, it will be surprising to so many people that a group like this got caught up in this world when I'm about to describe, but 10 percent of the [00:06:15] members of Tiger 21, who again managed today, 170 billion of their money. We're actually caught up in the Madoff Ponzi scheme. And what's remarkable is the way they got caught up is many of them got to it through Michael Sonnenfeld's own private investment, uh, [00:06:30] entity called MUUS or MUUS.

And so what is it that led them to invest in, in something like that? And it's all, it's all related to a few of the main biases that affect us all, but particularly affect wealthy people. So one of the [00:06:45] biases that relates to how you get into Madoff. Is something called the affinity bias. Affinity means that we want to be involved with something that reflects our desired status or, or a group of people that we want to be associated with.

So with Madoff, people weren't always allowed in. [00:07:00] So if you could be part of that group, there was a certain affinity attachment that's called affinity bias. You wanted to do it. The other reason they got caught up is something called authority bias. It's when we say, Hey, if all these successful CEOs, people like Fred Wilpon, who owns the Mets.

And people like Steven [00:07:15] Spielberg, famous, famous, uh, uh, movie industry executive. If he, if he's in it, then I don't have to do much due diligence. I can, I can get into it myself and be comfortable. And so affinity bias and, uh, and authority bias affected the billionaires the same way [00:07:30] it affects everybody else.

And, and, uh, finally. What I'll talk about is, is a lot of this group got their wealth from real estate. So when I looked at their quarterly publications of how they're allocated over the years, [00:07:45] uh, for the large majority of their history, they were over allocated to real estate. Why? Because it's the thing they're most familiar with.

It's called familiarity bias. We like to invest in and own things we know, irrationally believing that they'll help us more and [00:08:00] hurt us less than things we don't know. And what's ironic about that is the reason they formed this group is They were able to get liquefied, meaning sell some of their business interests, real estate in many cases, so they needed to diversify.

And so rather than diversify, they were [00:08:15] attracted to what they knew and further concentrated their wealth in the sector that they, uh, that they just sold out of, or in recent years it sold out of. So, uh, this is not to pick on the ultra wealthy, they're very smart people. Very successful. Uh, but, [00:08:30] but, but it's, it's to point out that human nature is immutable, doesn't change, it doesn't discriminate.

We're all human beings, whether we're wealthy, whether we're not so wealthy, whether we've got the highest level of education or no post high school education, we're [00:08:45] all going to react to fear and greed and envy and regret. And the pain of a loss. Basically the same way. And, and so the key here is to understand that next time you tune into CNBC and they tell you, Hey, today we've got Michael Sonnenfeld from Tiger 21, [00:09:00] and he's going to tell us how you can invest like the billionaires.

Understand. We don't want to invest like the billionaires because we already make enough behavioral mistakes. The difference is they do it with a lot more money. And a lot more confidence they're, so they're, they're overconfidence [00:09:15] biases, like taking a magnifying glass over the mistakes we're already making.

So we don't want that. We don't want to invest like the billionaires. Uh, what I've learned in my entire career advising wealthy clients is that there is almost no direct correlation or there is no direct [00:09:30] correlation between smart and rich. What I call between wealth and wisdom, some, some reason our society assumes there's a natural, uh, uh, correlation positive between wealth and wisdom.

The wealthier you are, the smarter you must be in everything. When it comes to [00:09:45] investing, like always, uh, success is based 99 parts on temperament, what we do. Did we sell out in response to fear or did we stay with our plan? And only one part, uh, intellect, what we know. And if we keep that in mind, uh, we'll, we'll [00:10:00] understand that, um, we're all human and we need to just understand how to not succumb to these biases that drive us to make irrational decisions, wealthy or not wealthy.

Thanks for tuning in to this episode of Fix it Friday. [00:10:15] Look forward to seeing you next time. You can find us on all your favorite podcast venues and crazywealthypodcast. com and also our website FusionFamilyWealth. com.[00:10:30] 

Voiceover: Thank you for tuning in to another episode of the Crazy Wealthy Podcast. For more insights, resources, and to sign up for our newsletter, visit crazy wealthy podcast. com until then stay crazy. Wealthy[00:10:45] 

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