In 1626, as the story goes, the native Lenape people sold the island of Manhattan to the Dutch East India Company for 60 guilders worth of trinkets, supposedly equivalent to $24. This transaction has since been regarded as a famously bad trade for the tribe, given Manhattan’s current estimated value of over a trillion dollars. However, this ignores compounding returns.
Compounding Returns
With the right investment approach, the tribe may have actually secured a better deal. If the Lenape had invested their $24 at a 6.5% real annual return over the past 398 years, they would have accumulated $1.8 trillion. This amount would be sufficient to repurchase Manhattan at today’s prices and still have billions left over. The secret lies in long-term equity investments.
US stocks have historically compounded at well over a 6.5% real rate. The Lenape investment committee wouldn’t have needed deep financial insights, special hedge fund access, or venture capital networks. They would have simply needed a steady, long-term equity allocation. As Buffett once said, “America has been a terrific country for investors. All they have needed to do is sit quietly, listening to no one.”
No Takebacks
This reminds me of an episode of Futurama (season 4, episode 6), where a family bought land on Mars from the native Martians for one rock. Initially, it seemed like a bad deal, but the rock turned out to be a massive gemstone. The family who bought the land from the Martian ancestors offered to sell back the land to the Martians for the gemstone. The Martians declined.
Institutions
Wealth compounds over time. Real estate can be an amazing investment; however, for non-institutional investors, real estate investing and operating is a more arduous way to accumulate wealth.
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