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Warren Buffett's Single Greatest Gift to You

Written by Charles Mizrahi
Posted December 20, 2016

One of the greatest deals ever was done by Peter Minuit.

Minuit, a director of the Dutch colony of New Netherland in 1626, is credited with the purchase of Manhattan Island for the Dutch from the Native American tribe called the Lenape, for traded goods valued at $24.

When Warren Buffett was just starting out, he wrote about this transaction in his 1965 letter to his partners to demonstrate the power of compounding.

For goods valued at $24, Minuit received 22.3 square miles, or about 621 million square feet. At the time he wrote the letter, more than 50 years ago, Buffett used the figure of $20 per square feet. Buffett calculated the land value for the island back in 1965 at $12.5 billion.

At first glance, this seems like a great deal: the Lenape got $24 in goods, and Minuit received an island that in 1965 was worth $12.5 billion... right?

Who Got the Better Deal?

Well, not so fast. Let’s take a step back and see if the Lenape got the better end of the trade.

If the Lenape invested the $24 they received and could make a 7% return, things would’ve turned out very well for them.

At 7%, $24 becomes $205 billion in 338 years... that’s much more than the value of New York City as valued by Buffett in 1965.

If we assume the Lenape continued their great investing and could continue to achieve their 7% return for the past 50 years through the end of 2015, their $24 investment would now be worth more than $6.5 trillion.

A recent paper written by a team of economists from Rutgers University valued the land price for Manhattan Island at $1.4 trillion.

While many might have pitied the poor Lenape for such a terrible trade, they had the last laugh. The value of their initial investment outperformed Minuit’s Manhattan by more than 4.5x.

Of course, life spans of hundreds of years are still relegated to figures in the Bible, but that doesn’t diminish the laws of compounding.

Here is a table of the gains from compounding $100,000 at various rates at periods of time that are more in line with most investors’ investment horizons: 

 

4%

8%

12%

16%

10 years

$48,024

$115,892

$210,584

$341,143

20 years

$119,111

$366,094

$864,627

$1,846,060

30 years

$224,337

$906,260

$2,895,970

$8,484,940

This is the exact table that Buffett used in his partnership letters. It appeared in almost all his correspondence with his partners from 1956 to 1969.

He wanted them to stay focused on the “enormous benefits produced by relatively small gains in the annual earnings rate.”

Every percentage point that you can achieve above the average can catapult your returns exponentially.

For instance, a 16% annual return, while only four percentage points higher than a 12% return, increases the value of $100,000 over 30 years from $2.8 million to more than $8.4 million.

An investor doesn’t need to hit the ball out of the park by trying to go for 20–30% returns and oftentimes losing money. Quite the opposite — long periods of time earning low double-digit returns can turn a small nest egg into a huge one over time.

Blue-Collar Millionaires

I’ve told you over the past several weeks of my research into how average blue-collar workers were able to make million-dollar fortunes over time.

These investors came from all walks of life... parking lot attendants, nurses, and secretaries.

They followed a simple secret that Wall Street does its best trying to dissuade you from using to make life-changing fortunes... and then let the laws of compounding do the rest.

And this is precisely the kind of investing you NEED to check out firsthand... 

All of the details are right here.

All my best,

Charles Mizrahi signature

Charles Mizrahi

Twitter: @IWPeditor

Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street.

And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the editor of Park Avenue Investment Club and the Insider Alert newsletters.

Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.

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