On the fifth day of November in 1626, Native Americans sold the island of Manhattan to the Dutch for the equivalent of 24 dollars. The absurdity of this story has unsurprisingly compelled some historians to question its veracity, and others to try to approximate inflation. These things do not interest me. Like any normal person would, I see this as an economics lesson.
Let’s suppose the legend is true, and suppose that following the sale, the Native Americans appointed a chief investment officer (CIO) of moderate intelligence to manage the 24 dollars. Said CIO achieves a respectable annual return of roughly 7 percent. Per the rule of 72, this return implies a doubling of assets every 10 years. 2^10 is 1024, meaning growth by that factor every 100 years. To make the math easy, we will call it 1000.
With this rough mental math, let’s see how the moderately intelligent and very old CIO has done with the proceeds of the sale.
1626: $24
1726: $24,000
1826: $24,000,000
1926: $24,000,000,000
2026: $24,000,000,000,000 ($24 trillion)
In 2014, experts valued the island of Manhattan at $1.74 trillion. To grow the amount from the sale to this number, the CIO need not be as smart as the one in the fictitious scenario above, which assumes a 7.2 percent annual return. With 24 dollars of seed money, a 6.57 percent return is all that would be required to grow that investment to $1.74 trillion by 2019.
With this in mind, it seems that the 1626 sale was not such a bad one; rather, the money was placed in the hands of someone who did not understand the power of compounding.
The chart below shows the return of the imaginary CIO and illuminates the delayed gratification of compound interest.
Anxious to experiment with compound interest? Click here.
This article is a modernized take on something Warren Buffett first alluded to in his 1965 annual letter to shareholders, and Mohnish Pabrai later adapted.