How to Invest Your First $1,000 (Benjamin’s Story)

Key Concepts

• Benjamin's Journey: A narrative of a young man's path from financial struggle to building wealth through investing.
• Speculative Investing: High-risk, often hype-driven investments with little regard for fundamental value (e.g., Skycoin, "Rocket Stocks").
• Fundamental Investing: Investing based on the intrinsic value of a company, its earnings, and long-term prospects.
• Dunning-Kruger Effect: A cognitive bias where people with low ability at a task overestimate their ability.
• Role Models in Investing: Learning from successful investors like Warren Buffett, Peter Lynch, and Joel Greenblatt.
• Diversification: Spreading investments across different assets to reduce risk.
• Market Correction: A significant decline in stock prices across the market.
• Compounding: The process of earning returns on initial investments and on accumulated interest or gains.
• Patience and Temperament: Crucial qualities for long-term investment success.
• Learning from Mistakes: The importance of making mistakes early with small sums to avoid larger losses later.
• Magic Formula: A quantitative investing strategy developed by Joel Greenblatt.

Benjamin's Early Financial Struggles and Aspirations

The story begins with Benjamin, a hardworking young man in rural Mississippi, living with his mother and younger sister. Their mother works two low-paying jobs to support the family, and their home is in disrepair, with a leaking roof and mold. Benjamin's father, a fisherman, disappeared in a storm five years prior, increasing Benjamin's responsibility to provide. Despite attending school, Benjamin works on fishing boats after school to earn extra money, much to his mother's concern. He often passes a wealthy neighborhood, dreaming of a better life for his family. Benjamin's mother emphasizes the importance of education for a better future. Benjamin, a bright student, saves $1,000 from his part-time job, a sum he learns is already in the top half of savings for Americans his age. He understands from conversations with adults in the affluent neighborhood that investing is a reliable way to build wealth, and starting early is beneficial. Benjamin is determined to grow his $1,000 to improve his family's life.

Year 1: Speculative Investments and Costly Mistakes

Fraternity Party and Skycoin Investment

At the start of his community college year, Benjamin attends a fraternity party where he receives "no-brainer" investment tips from an older student named Jack. Jack claims to have turned $100 into $5,000 in six months with "Skycoin," a new digital currency not controlled by the state. Jack's friends also praise these currencies. Driven by a fear of missing out (FOMO), Benjamin invests $500 of his savings into Skycoin, ignoring Warren Buffett's cautionary view on non-productive assets.

"Alan's Rocket Stocks" and Diversification

Benjamin then turns his attention to his remaining $500, inspired by a TikToker named "Alan's Rocket Stocks." Alan promotes stocks in companies supposedly on the verge of major breakthroughs: a cancer vaccine, nuclear fusion, and carbon dioxide capture. Benjamin, impressed by the potential and the TikToker's large following, divides his $500 equally among these three companies, believing that even one success would create a fortune. He fails to consider that none of these companies were profitable and relied on continuous stock issuance.

The Downfall of Speculative Investments

Within nine months, the value of Benjamin's "diversified" stock portfolio plummets to $25, which he sells for beer. Meanwhile, Skycoin initially triples in value, making Jack a hero. However, this success is short-lived. Skycoin suddenly declines by approximately 97% for no apparent reason, mirroring its inexplicable rise. Benjamin's confidence and portfolio are wiped out. He realizes his mistake in relying on others for advice and feels ashamed, recognizing he is at the bottom of the Dunning-Kruger Curve.

Year 2: Rebuilding Knowledge and Facing Market Volatility

Renewed Determination and Preparation

Benjamin returns home for the summer, motivated by his family's circumstances. He works on the fishing boats again, saving another $1,000. This time, he resolves to approach investing with proper preparation, avoiding the pitfalls of relying on unqualified advice. He adopts the philosophy of a TV character: "My brother has his sword and I have my mind. And a mind needs books like a sword needs a whetstone."

Seeking Guidance and Acquiring Knowledge

At a bookstore, Benjamin seeks out personal finance and investment books. The clerk, impressed by his ambition, recommends books by Warren Buffett, Peter Lynch, and Joel Greenblatt, emphasizing patience. Benjamin purchases three books for $100, which he later considers his best investment as they shape his investment philosophy.

Fundamental Investing and Market Correction

After reading the books, Benjamin invests his remaining $900 in cash-generating companies he believes are undervalued. Despite his college friends opting for index funds or avoiding investing after the Skycoin incident, Benjamin chooses to learn by investing directly, mirroring his role models. However, he buys his shares just before a significant market correction, causing his portfolio to drop by 40%.

The Importance of Temperament and Giving In

To cope, Benjamin rewatches advice from Charlie Munger and Warren Buffett on reacting to market declines with equanimity and the importance of temperament over intellect. Despite his resolve, the falling market makes it difficult. Seeing his money disappear, and with friends selling out and joking about his losses, Benjamin succumbs to pressure and sells his investments. Shortly after, the market begins to recover.

Encountering Simon and a New Perspective

Benjamin feels unsure how to proceed, watching the market rise from the sidelines. While scrolling through Twitter, he discovers a thread by "Simon," a humble, transparent investor with a proven track record who aligns with the philosophies Benjamin has learned. Simon discusses how the market crash created opportunities in his favorite companies and emphasizes comparing price and value, unlike the hype-driven advice Benjamin previously received. Desperate, Benjamin messages Simon, sharing his story. Simon responds, encouraging Benjamin not to give up and highlighting the value of making mistakes with small sums early on. He advises Benjamin that he needs someone to "yell 'don't jump, don't jump!'"

Year 3: Developing a Strategy and Long-Term Vision

Reignited Determination and Increased Savings

Benjamin's determination is reignited by his family's living conditions. He works more on the fishing boats, saving $2,000. He continues to envision his family's future in the affluent neighborhood.

Identifying and Learning from Idols

Benjamin identifies prominent investors, including Warren Buffett, as role models. He understands that Buffett, due to his large capital, can no longer significantly outperform the market, but his approach is still valuable. Benjamin feels he has found a clear path forward, a sentiment echoed by Munger and Buffett themselves, who endorse studying and copying skilled investors.

Practical Application of Investment Philosophy

Benjamin uses his identified "idols" in two ways:

1. Cross-referencing: He checks if his chosen investors have commented on stocks he discovers through other sources, such as using Joel Greenblatt's "Magic Formula" for screening.
2. Copying Ideas: He directly adopts investment ideas from his idols' portfolios, but emphasizes doing his own research, as trusting others blindly leads to losses.

Learning from Mistakes at a Low Tuition Fee

Benjamin recognizes the wisdom in Simon's advice about being glad he lost money early on. His early mistakes with small sums are like a sandcastle washed away near the shore, allowing him to learn and move his "construction site" further inland, increasing the chances of building something lasting. The "tuition fee" for these early mistakes was low due to starting with a small amount.

Building Habits and Future Prospects

A year later, Benjamin secures his first full-time job and begins consistently adding to his portfolio monthly. Many friends who exited the market due to volatility never returned, failing to establish good investing habits. Benjamin uses a compounding calculator and realizes that with a future free from early mistakes, the affluent neighborhood is within reach.