Editor's note: During market mania, you need to stay disciplined...

When Stansberry Investment Advisory editor Whitney Tilson launched his first hedge fund, he soon realized that he needed a plan if he wanted to be successful.

You see, blindly following the crowd and pouring money into popular stocks is a risky venture.

In today's Masters Series, Whitney shares the lesson he learned that saved his family and friends money while other investors lost big during the dot-com crash...

Launching My First Hedge Fund Months Before the Dot-Com Bubble Burst

By Whitney Tilson, editor, Stansberry's Investment Advisory

The "scariest" money I ever managed didn't come from a bank, a stranger, or some faceless billionaire...

It came from the people who would be sitting across from me at Thanksgiving.

That's the money I built my first hedge fund on. It was late 1998. I was around 30 years old, I had no formal training on Wall Street, and I had just made the rash decision to start my own hedge fund.

Looking back, it was reckless. I consulted no one and had no real strategy. All I knew was that the handful of stocks I had been buying had gone up, and I was young and overconfident enough to believe that made me a genius. As the old saying goes, I was confusing brains with a bull market.

I gave myself six weeks to open for business by January 1, 1999. I had to scramble to line up a law firm, a broker, an accountant, and a bookkeeper – all during the holidays. But the hardest part wasn't the paperwork – it was raising the money.

I opened my personal Rolodex and started calling the people closest to me. I moved over the accounts I had been managing for myself and my parents. My in-laws wrote a check. So did a cousin, four friends, and the brother of a business-school classmate. I also got funds from my dear college friend Bill Ackman, along with his father, Larry.

Bill had launched his own hedge fund, Gotham Partners, a few years earlier. Today, he runs Pershing Square Capital Management, one of the most closely followed hedge funds in the world, with more than $32 billion in assets under management. But back then, we were just two young investors with something to prove.

When the dust settled, I opened the doors with about $1 million to manage. It was, without a doubt, one of the smallest hedge funds in the world. Among the first stocks I bought were Berkshire Hathaway (BRK), Microsoft (MSFT), and Amazon (AMZN).

What I quickly realized was that when you lose some of a stranger's money, that's a bad quarter. When you lose some of your parents' and best friend's money, that's a bad Thanksgiving. I couldn't hide. Every dollar in that fund had a face attached to it. I knew exactly whose it was.

That fear is exactly why I can help you today. You see, I carried my family's savings through the greatest market mania of our lifetimes without blowing them up... and I believe that same discipline is about to matter more than it has in more than 20 years.

I'm convinced we're standing at the edge of another 1999 right now, and where you put your money to work today could be the most important decision you ever make.

Let me explain...

I opened my fund at the single most dangerous moment in a generation, during the peak of the dot-com bubble. The Nasdaq was rocketing straight up. Everyone I met was bragging about some Internet stock that had quickly tripled. People were quitting their jobs to day trade stocks full time.

It felt like the entire country had discovered a machine that was printing cash... and there I was, right in the middle of it, managing my family's hard-earned savings.

For a while, I got swept up in it, too. I owned hot tech names, and in 1999, that felt brilliant. My fund rose 31% that first year, handily outperforming the S&P 500's 21% return. But something started to nag at me...

Bill Ackman sat me down and asked a deceptively simple question about the tech stocks I owned: "Why exactly do you think they're cheap?" I mumbled something about great companies growing fast. He pushed harder. "Yes, but why are they undervalued?" he asked me. I had no answer, because there wasn't one.

That single question changed the course of my investing career.

At the same time, I was also reading the classics of value investing voraciously: Benjamin Graham's bible, The Intelligent Investor... Seth Klarman's classic, Margin of Safety... Peter Lynch's two books, One Up on Wall Street and Beating the Street... and Joel Greenblatt's You Can Be a Stock Market Genius. The collective wisdom of these investing giants was starting to sink in.

I remember how excited I was when I discovered that Greenblatt was teaching a course on value investing at Columbia Business School in the spring of 2000.

I found out when and where the class was held, showed up on the first day, and sat quietly in the back of the class. When it was over, I approached him, told him I was a big fan and had just started my own little fund a year earlier, and asked if I could sit in on the class for the rest of the semester.

He frowned. "Well, I'm not supposed to do this," he said. "But if you sit in the back and don't say a word, I'll allow it." I never missed a class.

Learning from a brilliant, legendary value investor at the exact time that the tech bubble was in its final blow-off phase was a transformative experience. It was the defining moment that caused me to shift away from my old, speculative ways and become a true value investor.

Slowly, one simple idea sank into my thick skull: The only sane way to build lasting wealth is to buy wonderful businesses for less than they are worth and then hold on.

So I did something that looked insane at the time. I turned my back on the hype, sold my high-flying tech darlings, and poured nearly a third of my tiny fund into Warren Buffett's Berkshire Hathaway at the precise moment the rest of the world was dumping it to chase tech stocks. Berkshire and the other boring, old-economy businesses I owned were being cast to the side as yesterday's news.

I vividly remember the day the tension finally broke: Friday, March 10, 2000, the day the tech-heavy Nasdaq peaked. Within weeks, the bubble began to collapse. Over the next two and a half years, the Nasdaq fell nearly 80%. Fortunes vanished into thin air. Those "genius" day traders were wiped out, and companies that had spent millions on Super Bowl ads a year earlier ceased to exist.

My little fund full of boring, quality businesses held on. While almost everyone around me was being torn apart, the money my friends and family had entrusted me with weathered the storm. Soon, more and more people started asking to invest with me.

The whole experience seared a lesson into me that I've never forgotten: When you're investing money that belongs to real people – people who you know and who trust you – you simply can't afford to blow them up. Not in a bubble, and not in a bull market.

That single, nonnegotiable rule enforces a kind of discipline that most of Wall Street never develops. It won't let you gamble or chase the next shiny thing. It makes you ask one honest question of every investment: "Would I be comfortable telling my own mother to invest in this?"

Years later, I came to realize this was the very same principle Stansberry Research had been built on in its earliest days – buying great, capital-efficient businesses at fair prices – rather than chasing whatever the crowd happened to be hyped about.

That's a big part of why I'm at Stansberry Research today. Because our entire business is built on the promise that we'll only share ideas we would genuinely want our own friends and family to invest in.

When I recommend a stock, I'm doing it the same way I invested back in 1999 – as if your money were my mother's, my father-in-law's, or my best friend's. Because to me, that's exactly what you are – family.

I've lived through previous manias. I know what it feels like to hold the savings of the people I love most while everyone around me is getting rich on nonsense. I know how that story ends, and I can feel the same forces gathering in the market again right now.

So I'm going to do exactly what I did in 1999. I'm going to ignore the hype, hunt relentlessly for world-class businesses, and treat your money like it belongs to the people I care about most. Because it does.

Regards,

Whitney Tilson

Editor's note: Whitney opened his first hedge fund at the single most dangerous moment in a generation, during the peak of the dot-com bubble.

Now, he's convinced we're standing on the edge of another 1999, and where you put your money to work today could be the most important decision you ever make...

That's why Whitney is stepping forward with a brand-new presentation to help everyday investors avoid getting wiped out... while building wealth. Sign up to hear all the details on how to protect and grow your wealth here.