YIS Unit 1: Lesson 1 - Who Are Investors

Summary

In this Young Investor Society video, James Fletcher teaches the principles of investing, emphasizing the importance of compound interest and the power of starting early. He uses hypothetical scenarios to illustrate how different investment choices and time horizons can significantly impact wealth accumulation. Fletcher encourages viewers to consider their investment decisions carefully, highlighting the potential for substantial returns with patience and strategic planning. He also addresses common concerns about market volatility and provides practical advice on how to begin investing, including the use of online tools and automated investment processes.

Takeaways

• 💼 Investing is not just for the wealthy; it's a mindset of building wealth over time, applicable to everyone who saves and invests money.
• 🚀 The decision to invest involves weighing the value of money today versus its potential future value, influenced by one's perception of risk and reward.
• 📈 Benjamin Graham, a renowned investor, believed that investors are those who believe in a better tomorrow, which is a core philosophy of investing.
• 💰 The power of compound interest is emphasized, where Albert Einstein referred to it as the 'eighth wonder of the world,' highlighting its significance in wealth accumulation.
• 🔢 A key lesson is that the earlier one starts investing, the more time there is for compounding to work, leading to significantly higher returns over time.
• 🏦 The type of investment matters; historically, growth stocks have provided higher returns over the long term despite periodic downturns.
• 💹 The importance of starting to save and invest early is underscored, with examples showing the substantial difference in wealth accumulation between starting at age 20 versus age 40.
• 📉 The script addresses concerns about market volatility, explaining that despite downturns, historical trends show that markets have consistently provided positive returns over the long term.
• 💻 Tools like Microsoft Excel or Google Sheets can be used to calculate compound interest, simplifying the process and allowing for easy investment planning.
• 💡 The presenter encourages setting specific investment goals and planning how to achieve them, including the rate of return needed and the investment vehicle to use.

Q & A

What is the primary message of the Young Investor Society video?

The primary message is to educate viewers on the importance of investing and the power of compound interest, emphasizing that everyone is an investor in some form and that the key to building wealth is understanding how to save and where to invest money for optimal returns over time.

How does the video define an investor?

The video defines an investor as someone who believes in a better tomorrow and makes decisions on the value of money today versus its value in the future, rather than just a greedy person on Wall Street.

What is the significance of Benjamin Graham's quote in the video?

Benjamin Graham's quote about investors being believers in a better tomorrow is used to highlight the forward-thinking mindset that investors should have, focusing on long-term growth and wealth accumulation.

What is the purpose of the $100 and Mercedes scenario presented in the video?

The scenario is used to illustrate the concept of present versus future value, helping viewers to understand the decision-making process involved in investing and how it reflects one's perspective on wealth and time.

How does the video explain the concept of compound interest?

The video explains compound interest as the magnifying effect of money over time, where starting to invest early allows for more time to compound and thus accumulate more wealth.

What does Albert Einstein's quote about compound interest signify in the context of the video?

Einstein's quote is used to emphasize the extraordinary power of compound interest, suggesting that it is one of the most impactful forces for wealth creation when utilized effectively.

What is the role of time horizon in investment decisions according to the video?

The video suggests that a long time horizon allows for the maximization of returns through investment, as it provides more opportunities for compounding and growth despite potential market fluctuations.

How does the video illustrate the impact of different investment choices on wealth accumulation?

The video uses examples of investing in growth stocks, rare art, and real estate to show that the choice of investment vehicle, along with the rate of return and the time period, significantly affects the amount of wealth accumulated.

What advice does the video give regarding starting to invest early?

The video advises starting to invest as early as possible to take advantage of the power of compounding, highlighting the substantial difference in wealth accumulation between starting at age 20 versus age 15 or older.

How does the video address the concern about stock market downturns in relation to compounding?

The video reassures viewers that despite market downturns, historical data shows that over any ten-year period, the markets have averaged positive returns, emphasizing the importance of patience and long-term investment strategies.

What tools or methods does the video recommend for calculating compound interest?

The video suggests using tools like Microsoft Excel, Google Sheets, or online compound interest calculators to easily calculate the effects of compound interest over time.

What steps does the video suggest for someone looking to start investing?

The video recommends setting up custodial accounts for teenagers, using online brokerages for adults, and automating the investment process through regular transfers into the stock market, preferably into simple ETFs or index funds like the S&P 500.

Outlines

00:00

💼 Introduction to Investing Mindset

James Fletcher introduces the concept of investing, challenging the common perception of investors as greedy Wall Street figures. He differentiates between spenders and investors through hypothetical scenarios involving immediate and future monetary rewards. Fletcher emphasizes the importance of valuing money differently in the present versus the future and introduces the idea of compound interest, a key principle in investing. He highlights Benjamin Graham's influence on Warren Buffett and the belief in a prosperous future as a core tenet of investing. The summary ends with a call to reflect on one's own investment behavior and the impact of saving and investing decisions on wealth accumulation.

05:03

📈 The Power of Compound Interest

This section delves into the power of compound interest, illustrating how different investment choices can yield vastly different outcomes over time. Fletcher uses a hypothetical scenario to compare the long-term returns of growth stocks, rare art, and real estate. Despite the volatility of growth stocks, they outperform other investments over a 50-year period due to their higher average annual returns. The summary underscores the importance of starting to invest early and the significant impact of compound interest on wealth accumulation, even for those with modest incomes.

10:06

🚒 Case Study: Firefighter's Investment Strategy

Fletcher presents a case study of a firefighter who saves $1,000 annually for 50 years. He explores the potential outcomes of investing this money in various financial instruments, from a savings account with no risk and zero return to the stock market, which historically has provided a 10% annual return. The summary highlights the dramatic difference in wealth accumulation based on the investment choice, with the stock market offering the potential for millions in returns. It reinforces the message that the rate of return and the timing of investment are critical factors in building wealth.

15:08

💡 Practical Steps to Start Investing

The final paragraph provides practical advice on how to begin investing, suggesting the use of custodial accounts for teenagers and online brokerages for adults. Fletcher recommends automating the investment process through regular, automatic contributions to an investment account, preferably in a simple ETF or S&P 500 index fund. He concludes with a challenge to set an investment goal and calculate the necessary rate of return and investment strategy to achieve it, emphasizing the importance of taking action to secure one's financial future.

Keywords

💡Investor

An investor, as discussed in the video, is someone who allocates money with the expectation of generating a return over time. The term is not limited to Wall Street tycoons but includes anyone who saves and invests money for future financial growth. The video emphasizes that everyone is an investor in some capacity, whether it's for a home, education, or retirement.

💡Compound Interest

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. The video highlights Albert Einstein's quote, calling it the 'eighth wonder of the world,' to stress its power in growing wealth over time. The script uses examples of different investment types to demonstrate how compounding can significantly increase returns.

💡Risk Tolerance

Risk tolerance refers to an individual's willingness to take risks with investments. The video uses a hypothetical scenario to illustrate how different people might choose between immediate cash and a future reward, indicating their level of risk tolerance. Those willing to wait for a larger future payout are often more risk-tolerant and open to potential gains through investment.

💡Time Horizon

The time horizon in investing is the length of time an investor plans to hold an investment before selling it. The video explains that a longer time horizon allows for more significant compounding effects, which can lead to higher returns. It encourages viewers to start investing early to take advantage of this concept.

💡Savings

Savings in the context of the video refers to the act of setting aside money for future use. It's presented as a fundamental step in becoming a successful investor. The video stresses the importance of regular savings, no matter how small, as a key component of building wealth over time.

💡Investment Options

Investment options are the various financial instruments or assets that investors can choose to grow their wealth. The video mentions different types such as stocks, bonds, real estate, and rare art, each with its own risk and return profile. It uses these examples to discuss the impact of different investment choices on long-term wealth accumulation.

💡Return on Investment (ROI)

Return on investment (ROI) is the profit or loss made on an investment relative to its initial cost. The video uses ROI to compare various investment options, showing how different rates of return can drastically affect the final value of an investment over time, especially when compounded.

💡Automated Investing

Automated investing refers to the process of setting up automatic contributions to an investment account. The video suggests this as a strategy for young investors to start building wealth. By automating the process, investors can consistently save and invest without the need for constant manual intervention.

💡Stock Market

The stock market is a platform where shares of publicly traded companies are bought and sold. The video discusses the historical performance of the stock market, particularly the S&P 500, to demonstrate the potential for high returns over the long term. It also addresses the volatility of the stock market and the importance of a long-term perspective.

💡Financial Goals

Financial goals are the specific, measurable objectives an individual sets to achieve in their financial planning. The video challenges viewers to set their own financial goals and consider the rate of return needed to achieve them. It emphasizes the importance of planning and investing to reach these goals, whether they are for retirement, a house, or other personal aspirations.

Highlights

Introduction to the concept of being an investor and the mindset of wealth building over time.

The importance of understanding the value of money today versus tomorrow in investing decisions.

Benjamin Graham's influence on investing philosophy, teaching the belief in a better tomorrow.

The significance of the decision-making process in investing between immediate and future value.

The concept of compound interest as the magnifying effect of money over time.

Albert Einstein's quote on compound interest being the eighth wonder of the world.

The power of compound interest demonstrated through a hands-on activity with different investment options.

The impact of time horizon on investment returns, emphasizing the benefits of long-term investing.

The example of a firefighter saving $1,000 annually and the potential returns from different investment vehicles.

The significant difference in wealth accumulation between starting to invest at age 20 versus age 40.

The potential of achieving millions through investing with high annual returns, as demonstrated by Warren Buffett.

The critical factors for successful investing: earning a high rate of return and starting early.

Addressing common concerns about investing during stock market downturns and the importance of patience.

Practical advice on how to calculate compound interest using tools like Microsoft Excel or Google Sheets.

Guidance on how to start investing, including recommendations for brokerages and investment apps.

The suggestion to automate the investment process for a consistent and disciplined approach to saving.

A challenge to set an investment goal and plan the steps to achieve it, including the required rate of return.

Transcripts

[Music]

welcome young investor society my name

is James Fletcher I'm a portfolio

manager and I'm the founder of young

investor society and today I would like

to teach you about what it means to be

an investor so when you hear the word

investor what do you think about do you

think of a greedy investor on Wall

Street or do you think of someone

building wealth and becoming wealthy

over time so let's start with a question

to find out whether you're a spender or

an investor I'll give you $100 today or

if you wait one year I will give you a

brand new Mercedes which one will you

take will you take the cash will you

take the car or of course you'll take

the car anyone would wait one year for a

brand new car okay so let's let's try

another one

I will give you $100 today for or $100

one year from now which one would you

take of course you would take the money

today it wouldn't make any sense to wait

a year for for the same return today

when you're investing you're making the

decision of how much worth the money is

for you today versus how much is it for

you tomorrow Benjamin Graham the teacher

Warren Buffett and one of the greatest

investors of all time said that

investors are believers in a better

tomorrow okay so let's try another

question and let's make it a little more

complicated five years from now I will

give you five hundred dollars take out a

notepad maybe think about it and how

much would you be willing to put aside

today for five hundred dollars five

years from now would you be willing to

set aside a hundred dollars would you be

with only willing to set aside or four

hundred fifty dollars for five hundred

dollars would you only be willing to set

aside fifty dollars today and what does

your answer to that question tell you

about yourself

so if I'm only willing to set aside you

know four hundred ninety nine dollars to

get five hundred dollars a year from now

which basically means my my money I'm

willing to invest money for a small gain

five years from now that probably tells

you that you're a saver and it also

tells you that you're probably pretty

risk intolerant that you're very

cautious what about if I'm willing to

put aside fifty dollars today for five

hundred dollars five years from now

that tells you that you're willing to

take more chances that you're willing to

probably be more aggressive and that and

that your money means more to you now

than it does five years from now so the

truth is we are all investors if we

think investing is only for those those

highbrow financial types on Wall Street

the reality is that everyone is an

investor we all make money during our

lifetime and we're all in the business

of saving and investing for a down

payment on a home for our kids college

and we're all investors and the question

is how good of an investor are you the

question of how much wealth you will

build in your life really boils down to

two questions the first question is are

you able to save each year and how much

you're able to save each year and the

second question is when you save where

do you put the money so that's it can

you save money and then when you save it

how do you where do you put it and can

you invest it so does it really matter

where you put your money

yeah of course it does

investors talk about something called

compounding or compound interest have

any of you heard that phrase before it

basically talks about the magnifying

effect of money that money is magnified

over time and that starting earlier

allows you to compound more albert

einstein called compound interest the

eighth wonder of the world so let's

let's explore the power of compound

interest

and I and let's start with handout 1.1

take a minute and go through this

handout and then we'll come back and

discuss it

all right welcome back I hope you

enjoyed the activity so what did we

learn did you invest in rare art did you

invest in real estate did you invest in

growth stocks with the highest return

but then go down every five years so

what are the answers if you're in 25

years

the answer is growth stocks would give

you a hundred and sixty seven thousand

dollars four hundred and twenty two

dollars at fifty years old

the answer is growth stocks again would

give you 1 million two hundred forty

nine thousand six hundred sixty one

dollars and then at age seventy what

does the answer again is growth stocks

six million two hundred thirty nine

thousand dollars

eight hundred sixty two dollars so how

is that possible growth stocks had the

highest return but also would go down

every five years in our example rare art

for example at age seventy which never

went down which were safe and then

tripled at the end would give you three

hundred thousand dollars in real estate

which was safe and and went up every ten

years would only give you six hundred

twenty seven thousand dollars so what do

we learn from this activity one thing we

learn is that if your time horizon is

long your your best interest is to

maximize your returns and so in this

activity growth stocks had the highest

annual return and they gave you the

highest return so I hope that helps you

understand compound interest I hope the

other takeaway for you is if you start

early and you can earn a 10 or 12

percent return compounded per year

look at those numbers by by the time

you're 70 years old you could achieve

six million dollars over six million

dollars so the power of compounding is

incredibly powerful let's go through one

more example here in our presentation so

let's assume you're 20 years old and you

just took a job as a firefighter which

is your childhood hood dream

unfortunately your salary is meager but

you make it a goal to save $1,000

per year and put it in a retirement

account you work and save for the next

50 years until you retire so so 50 years

of work saving $1,000 per year so where

can you put your money in this scenario

so there's a couple of options you can

put your money in a savings account

which will keep your money at no risk

but we'll give you a zero percent return

you can put your money in a in real

estate or in bonds and on average real

estate or bonds give you about 3% annual

return per year in 50 years what will

you have you will have a hundred and

sixteen thousand dollars saved up where

else could you put your money you could

put your money in the stock market the

stock market the SMP 500 in the United

States has averaged since 1902 the year

2015 a 10 percent annual compound return

so real estate was 3 percent the stock

market was 10 percent and the stock

market would give you 1 million three

hundred fifty nine thousand dollars $199

accumulated in 50 years amazing isn't it

so even a firefighter with a meager

salary saving only $1,000 per year would

still have over a million dollars by the

time here he retires he or she retires

ok so let's assume you there's a fourth

way to put your money and let's just

assume for fun that you are Warren

Buffett and you can beat the stock

market and let's say you can generate

20% annual rate of return so double the

sp500 where do you think this gets you

by the time you retire 20% annual return

in 50 years would give you 109 million

dollars eight hundred twenty six

thousand one hundred nineteen dollars

the difference is amazing so when we

think these are just small numbers

between doesn't really matter whether I

compound at an annual return of 1

percent or 3 percent or 10 percent or 20

percent the truth is it matters and a

deal and and those investors that are

able to invest at 10% or even 20% like

Warren Buffett then you wind up with

millions or hundreds of millions of

dollars because of that high rate that

you're able to compound starting early

is another way to increase your money so

does it matter when you start to invest

so let's say you're the fire fighter and

let's say instead of starting at age 20

you start at age 40 by the time you

retire at age 40 you would have a

hundred and ninety thousand dollars

seven hundred seventy three dollars if

you started at age thirty you would have

five hundred thirty five thousand

dollars six hundred eighty two thousand

dollars and if you started at age twenty

in our original example you would have

1.3 million dollars so does it matter

when you start to invest yes so that's

why we say that two most important

questions are when you start to save and

what rate of return you can save at so

the two most critical factors earn a

high rate of return and start early

investing what about now what about if

you're 15 years old and you just join

young investor society is there really

going to be a difference between age 20

and age 15 the reality is if you start

five years earlier it would be 2.2 two

million dollars it's a difference of

almost a million dollars between if you

start investing when you're 20 and if

you start investing when you're 15 only

five years but these are five years that

could put an extra million dollars in

your retirement account so what are the

effects of the firefighter we can review

it here if you at age 70 starting at age

40 you would have a hundred ninety

thousand dollars at the annual rate of

return of 10 percent but if you start

when you're age 20 its 1.3 million

dollars I hope this lesson was was

helpful for you I

you see that compound interest just like

Albert Einstein said is the eighth

wonder of the world and I hope that you

as as a young investor as someone

learning about the markets will take the

time now to invest it literally is your

million-dollar decision

to decide now to start investing in

compounding and and putting money in

your future retirement account

all right I hope you enjoyed that lesson

let's take a couple of the most common

questions after we learn about that

lesson the first one is what do we do

when the stock market goes down and how

are we able to compound and make money

when we know that the stock market has

terrible periods where the market goes

down 20 30 % it's a great question and

it is absolutely true that there are

periods where the markets will go down

and they may even go down by what we

call a bear market they go down by more

than twenty or thirty percent but over

any ten-year period in history the

markets have always averaged up even if

you bought at the worst period of time

right before the Great Depression in

1929 ten years later you have always

made money even then and long term

almost over any decade you have been

able to achieve 10% returns in the stock

market and so while the stock market

will go wildly up one year and wildly

down the next if you're able to be

patient and save that money for ten

years then you're able to achieve that

long term rate of return okay second

question how do we calculate compound

interest

so in though in the worksheet there were

some questions of how do we calculate

the how do we calculate compound

interest especially when we don't have a

calculator are there ways on the

computer or other ways to calculate it

it's a great question and actually when

when I calculate compound interest as an

investor oftentimes I use Microsoft

Excel or Google sheets and so in the

worksheet which we did we took the

original amount and multiplied it if it

was a 5% return the next year we

multiplied it by 1.05 and then in the

next year if it was a 3% decline we

multiplied it by 0.97 which is one minus

that percentage you can set up a formula

in Google sheets or you can go online to

compound interest calculators these will

help you calculate compound

online there's many tools where you can

just put in a rate of return and and how

many years for this rate of return and

it will give you the number so I

encourage you to go online and and and

experiment with Microsoft Excel and

Google sheets and this will help you

calculate compound interests in a more

seamless easier to use manner third

question last question that we often get

is okay James you've told us about the

power of compounding I believe you I

want to start investing how do I

actually start investing so how do I

actually start investing today and what

I would tell you is there's many ways go

to your local brokerage and look up

custodial accounts if you're a teenager

or if you're an adult go to your local

fidelity or Schwab or whatever brokers

you want to use and they will help you

get started there's also great online

brokerages so brokerages like each trade

or interactive brokers and then more and

more you're seeing mobile brokerages or

or investment accounts made for apps so

here we have Robin Hood which is a free

stock trading app unfortunately for

teenagers they don't have custodial

accounts yet so we like to recommend a

stock pile which is a great app for

teenagers and actually as why is members

you'll get five free dollars if you go

on the dollar day section of the website

you can get five free dollars to start

investing at stock pile so those are

some ways to actually start investing

the second thing I would say and answer

that question is how do I actually get

started is when you get started

investing the most powerful way is to

automate the investment process so take

a bank account and then have it

automatically transfer let's say $50 per

month and then you can tell your

Interactive Brokers account or your

fidelity account to take that $50 a

month and automatically invest it in the

in the stock market and I would

recommend just a simple ETF or a simple

sp500 and this is a way where you can

start investing young and automate that

and investing process thank you so much

for your time the last article I'd like

to give you as part of this lesson is a

challenge and I would like to have you

take a minute take out a note card if

you're taking notes write it down and I

want you to make an investment goal what

is one goal that you want to save money

for maybe it's for a wedding maybe it's

for a down payment on a car maybe it's a

house or maybe it's just your dream is

you want to retire when you're 70 years

old and you want to buy a house in the

Bahamas

whatever goal you have write it down

right now and I want you to think what

rate of return do I need to earn to

achieve this goal and then to achieve

this goal

this rate of return what do I need to do

to achieve it and where do I need to put

my money and this will help you make a

plan and so you can achieve your

investment goal so I hope you enjoyed

this lesson I hope the FAQ section is

helpful and I hope more than anything

that you'll start to invest now and put

money in your future account Thanks