There is a fun story Warren Buffett tells about the sale of Manhattan by the Manhattan Indians to Peter Minuit in 1626 for $24.  Some would reflexively suggest $24 was a paltry sum to let go of what these Indians clearly knew would become the financial center of the universe.  Maybe, maybe not.

When Buffett pondered this question in 1965, he figured the land value of Manhattan worked out to roughly $12.5 billion, which worked out to a 6.12% compounded annual gain.  Not a horrible return on capital.  However, had these Indian speculators managed to earn 6.5% instead, the $24 they received would have become $42 billion.  And then this is where is gets a little weird:  could the Indians have managed to earn just ½% point extra a year, 7% vs 6.5%, the value jumps to $205 billion.  This isn’t a typo, it is the extreme power of compound interest combined with time.

This story demonstrates why we must, as investors, be aware of how we are spending our money, and what that money is doing when not being spent.  Is it sitting in cash?  Is it buying and selling too often and often at a loss?  The most important thing is that we are finding good, long-term investments that can allow the work of compounding interest to do its job.  Some things in life are complicated.  Allowing your money to work for you while you play isn’t one of them.

Together with Pacific Trust, a plan can be put in place that focuses your investment portfolio on the long-term.  Keep an eye on your fees, keep your finger off the trading button, and get your money working for you.  If not yesterday, then today.  It’s amazing what $24 can become.

Mark Lechler
Managing Director