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Dear Tom,

Thank you for your note dated August 28. Let me begin by apologizing for being -- er, what?! -- 44 days late in replying. Isn't this the modern condition? Too many emails, too little time. However, I have wanted to reply to your email for some time now, as you're in an enviable position. And I wanted to turn this into a Rule Breaker column as my thoughts may be useful for other 18-year-olds (or their parents...).

Congratulations on the full college scholarship! A private money scholarship, to boot. It's wonderful to watch the American system of enlightened capitalism at play. Your supply of industriousness and talents have matched up with someone else's demand to be generous. The result? You have obtained valuable "venture capital" in the form of a full free ride through college. Pay your first debt of gratitude to your benefactor or his family, because it was through his own hard work and generosity and most of all through his INVESTING that you have scored a free education. And then you have a second debt of gratitude to pay before we get started: to your parents. What a wonderful investment in you they made over the first 18 years of your life... the hard work and the great joy and sometimes sorrow that went in to raising you in the first place.

I must loudly applaud their willingness to turn the money they had saved for your college -- $130,000 -- directly over to you! It certainly wouldn't be there without them, you lucky dog; then again, you in effect earned it. If only every young student were so trusted and encouraged.

You wrote asking what you should do with that $130,000. I have a simple three-step plan.

As The Motley Fool's mission is to educate, to amuse, and to enrich, you might guess at my first step: Get "eddicated." In this case, fit in a little reading around your class schedule. Here are your options, take your pick: You Have More Than You Think, our book written for those who want to make their first investment, or our 13 Steps to Investing Foolishly (which you can obtain as a free book upon registering as a Fool, or read online if that's more to your liking). In either case you will obtain not just information -- which is superoverabundant in our society today, and every day more so -- but more importantly a point of view. (That's if we've done a good job as writers, that is.) You can use that point of view to guide you toward making better financial decisions throughout your life. I can think of few better investments at the age of 18!

OK, all finished reading either of those? Great -- here's step two: Tell me, did you find yourself enjoying this reading? Or did it feel more like a task?

There's no "right" answer to that question, but the one simple answer you provide will guide you as an investor:

If you enjoyed it, we shall call you an enthusiast.

If you found yourself counting the pages or minutes till you'd be done, we shall call you a pragmatist.

In response to the question above, something like 90% of the world will or should identify itself as a pragmatist. That leaves 10% who are enthusiasts. The enthusiasts make more money from their investing, but trade their time for that money. It's a trade they're willing to make, because after all they enjoy spending their time as students of the game of business. The pragmatists rarely generate anything looking like spectacular investment results. But the pragmatist can generate average results with little time or effort, freeing up all those extra hours for the other passions of their lives. And average results, now that you know the power of compounding, are over a long period of time quite spectacular.

I am a natural-born enthusiast. Your mileage may vary. And this isn't to say you'll only ever be one or the other over the course of your life: As we get older, some of us willy-nilly become enthusiasts almost by necessity, as our money grows.

Having answered that question, you are now ready for the final step, step three. Indeed, if you've done your reading, Tom, you can probably figure out step three on your own. But here it is anyway:

If you're a pragmatist, put that $130,000 in an index fund (such as the Vanguard Total Market index fund or their S&P 500 index fund). You will be investing that $130,000 in the entire stock market, owning pieces of most of the companies anyone would want to own on our stock market today. It's such an easily understood concept, and you always know where your money is. Also, you'll pay a very low annual fee for the privilege of that ownership. And 30 years from now, if you still hold that investment and the market performs over the next 30 years as it has in the previous 70, your $130,000 will be worth $2,975,999. You'll be 48 years old. Enjoy the cash and your increasing financial independence. By the way, if you keep it invested in the same place at the same rate of return for another 20 years, it'll be worth $23,993,427. You'll be 68. What will your lifetime expectancy be by the year 2050? Probably at least another 40 years.

If you're an enthusiast, take half the money ($65,000) and stick it in the same place. That is a steady long-term winner for you, as per above. But as important, it will provide you a benchmark for competition. Because with your other $65,000, you will choose yourself a good broker and invest in 10-13 stocks (in increments between $5000 and $6500). These shares of ownership will be in companies you know and really like, that are extremely relevant to our era and, you think, likely to be profitable at least 25 years out. Do what we do at The Motley Fool and buy to hold. That is, buy with the hope of staying invested in those companies for at least five years, if not five decades. But keep your eyes open and recognize if your company is failing, or circumstances have so fundamentally changed that you've found some better place to put the money.

If you wind up five years from now ahead with your index fund money, consider playing more the pragmatist with the money you earn in salary. But if your performance was still encouraging, don't abandon individual stocks altogether. If your individual stocks meaningfully outperform the index fund, you are an enthusiast with great reason to be so! Stay diversified and keep your eyes and your investment dollars trained like the red dot of a laser-focus on the future.

In either case, you're extremely well-positioned one day to put someone else's children through college. Tom, I would encourage you to do at least that much. Be joyful.

And my very best Foolish wishes,

David Gardner

October 12, 2000