The Ultimate Investment Club for Entrepreneurs

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If building trust is the first step to building a profitable business, CMS made a mint by screwing up and then owning up. None of the clients were happy, of course; some still grumble about Chuck E. Cheese even now, almost 20 years later. Yet CMS has a client base of realists who understand that things can go wrong. "One of the first investments that I made with them went bad," recalls client Donald Crawford, a broadcast entrepreneur who owns a chain of 28 radio stations around the country. "They had the mantra of protecting clients' capital at all costs. And on their own initiative they made good on any losses we sustained. It just showed me that these were men of their word and it was a safe bet being with them for the long haul."

It is a widely held truism that entrepreneurs tend to be far better at creating personal wealth than managing it. Solomon and Silberberg don't go so far as to say that entrepreneurs are bad investors, but CMS has long understood that people busy building a business have such enormous time constraints--and such a single-minded focus on their work--that they're prone to stumble. "We knew from the beginning that there was a real need for diversification and that our clients weren't doing it," says Silberberg. "They didn't know how to do it. They were just like we were--they had the attention span of a gnat. We also knew they weren't going to do the homework. They were making huge bets that were ridiculous. We saw that we had the opportunity to create a real service. We were at least going to make more studious bets. And we were going to take some of those eggs and put them in other baskets." The good thing, adds Silberberg, is that his clients have always understood their limitations. "The difference between the entrepreneur and the doctor is that the doctor doesn't know anything about investments but thinks he does," he says. "The entrepreneur doesn't know anything about investments and recognizes it. Doctors are wonderful people. They're just not good business people."

The years have taught Silberberg several lessons that he likes to share with his clients: "Number one would be that people are everything," he says. "Both the beginning and the more sophisticated entrepreneur get carried away with the sex appeal of the transaction--they have to look at the people behind it." His second point is that many investors look at how much money they can make--and gloss over the risks: "We look closely at how much we can lose." His third key lesson goes to the heart of the entrepreneur's dilemma: If you want to create wealth, Silberberg says, most do it by concentration, just as his clients have done as they built their businesses. At some point, though, there's too much risk in that strategy, and that's when it becomes imperative to protect wealth by diversifying. This is not, Silberberg emphasizes, simply a matter of splitting money between stocks and bonds. "The beginning entrepreneur cannot get access to some of the really good asset classes," he says, referring to the kind of exclusive private equity deals his firm favors. But Silberberg says every entrepreneur can diversify by vintage, by geography (especially with real estate), and by choosing between different operating partners.

It has taken Silberberg and company more than a decade to smooth out their approach to investing and create a successful system; in the meantime, the firm has found it useful to move away from piecemeal investments in small businesses like fast-food franchises. CMS now makes all investments from pooled funds, to which clients contribute, so as to socialize the returns. As Solomon puts it: "We're able to take the grand-slam home runs and doubles and strikeouts and come up with a good average." While CMS's focus on up-and-running companies and real estate minimized the damage from the bursting of the technology bubble, the firm has nevertheless struggled to find big winners over the past few years. For one thing, as the stock and bond markets have grown tougher, the number of investors pouring into the marketplace for alternative investments in private equity and real estate has grown, leading to increased competition and higher prices. At the moment, CMS has scaled back the size of its funds to correspond with what it sees as a scaled-back opportunity to buy good companies--and good real estate projects--at good prices.

"What we're trying to do is generate a 500-basis-point advantage over the public markets," says Silberberg. CMS has easily beaten this goal over the past two decades, racking up a 20% return in its multifamily housing funds (while public multifamily REITs earned on average about 11%) and a 20% return in private equity (while the S&P 500 returned about 15%). Irvin Naylor, a Pennsylvania entrepreneur who made his fortune from a box company and who now owns several East Coast ski resorts, has about 10% of his net worth invested with CMS. "My rate of return, cumulatively for 20 years, is 24.5% annually," he says. But Silberberg says he always tells new clients that "yesterday is yesterday." He adds that if people like Warren Buffett and Jeremy Siegel are correct in predicting more modest returns of, say, 7% over the next few years, then CMS would be shooting for a 12% return in private equity. Says Silberberg: "That would make us and our clients very happy."

The person entrusted with this task at CMS is Bill Landman, the chief investment officer. In the 1970s and early 1980s, before he came to the firm, Landman worked as a sports agent, and his demeanor--casual, friendly, confident, yet completely opaque--hints at a bearing that must have served him well in contract negotiations. During the spring and summer season he worked with baseball stars such as Tony Pe - a, Ken Griffey, and Tim Raines; during the off-season he spent time cutting real estate deals. His interest in private equity deals came later. "I'm the ultimate generalist," Landman says. At CMS, however, where equity investments run the gamut from buyout funds to CD packagers to tube-sock manufacturers, and where the real estate investments range from garden apartments in Birmingham to rental complexes in Seattle, that's not a bad thing. Versatility, and knowing a little about a lot, is a plus--especially since the firm has a big Rolodex of people who know a lot about a little.

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