Rekenthaler Report

# What Has Been Manhattan's Return?

Assessing Peter Minuit’s fabled \$24 investment.

Mario’s Tweet
Veteran fund manager Mario Gabelli raised the question. What has been the annualized gain for Manhattan? The property was purchased in 1626. How profitable was that transaction?

The task is both easy and impossible.

The (comparatively) easy part is computing the investment’s annualized price return. The island’s cost, admittedly, is mythical; the U.S. dollar didn’t exist in 1626. However, the fiction suffices. We know that 393 years have passed, and we’ll assume \$24 as the starting point. All that remains to fuel the calculation is Manhattan’s current value.

Wikipedia pegs Manhattan’s worth at \$3 trillion, while a few years back three Rutgers researchers rated it at \$1.75 trillion. We’ll split the difference and say \$2.5 trillion. As we shall see, accurately assessing the ending value for a multicentury investment isn’t particularly important. If the true value is half or double our guesstimate, the rate of return barely changes.

By the Numbers
To show off, I’ll use my spreadsheet’s Internal Rate of Return calculator rather than my usual trial-and-error method. Oops! The program decided that the year 1626 didn’t exist. Nobody invested back then, it seems. Peter Minuit begs to disagree, Mr. Gates. No matter. I will settle for my usual trial-and-error method, using the Power function. My intuition fails me; I have no idea what rate of return transforms \$24 into \$2.5 trillion, over almost 400 time periods. (Feel free to make your own mental guess.)

Let’s start with 10%. After all, it’s a round number. Enter 1.1 in the number field, 393 as the power, and multiply by the \$24 starting price. The result is ... 4.44 times 10 to the 17th power. The spreadsheet has gone on partial strike; it refuses to print all those digits. With some effort, though, I determine that the number is \$444 quadrillion.

That’s called “being wrong.” After some tinkering, I arrive at the true annualized figure: 6.7%. As I previously wrote, the appraisal’s error term is inconsequential. If Manhattan is worth only \$1 trillion, the rate of return declines to 6.4%, and if the island is worth 6 times that amount, at \$6 trillion, the annualized gain is 6.9%. An enormous difference in ending value but only a modest adjustment to the growth rate. Such is the repercussion of investing over a very long time period.

Changing the starting point has a larger effect. Had Minuit spent \$2 rather than \$24--which, for all we know, might have been the case--the calculated rate would grow to 7.4%. In contrast, bumping the purchase price to \$200 reduces the return to 6.1%. It turns out that a few initial dollars affect the result more than several trillion later dollars.

Indeed, had Minuit conceded \$0.10 worth of beads, as opposed to \$24, the investment’s annualized return would have jumped 8.2%. That computation is correct, of course, but also silly. Even in 1626, the distinction between \$0.10 and \$24 to the Dutch West India Company, Minuit’s employer, was negligible. To have that modest amount alter the assessed rate of return by an annualized 150 basis points (that is, the difference between 8.2% and 6.7%) over almost four centuries is the tail wagging the dog.

Considering Income
Quibbles about interpretations aside, the easy job is finished. The price return on Minuit’s legendary purchase looks to have been between 6.5% and 7%. What remains is the impossible chore of determining the island’s ongoing cash flows. Total return, after all, consists of two components: capital gain and income. Our exercise has addressed capital gain only. It understates, probably severely, Manhattan’s rate of annual return.

And neither I, nor anybody else, has the faintest idea of how to capture that missing information. Indeed, even the term “cash flows” is insufficient. In the early days, Manhattan yielded natural resources. To calculate a total return on the investment, that benefit would also need to be considered, along with the profits accrued by Manhattan’s property owners over the years, decades, and centuries. (As, of course, would be all monies spent on improving the property.) Good luck acquiring such data.

Nonetheless, the numbers are instructive, as they illustrate the remarkable nature of our time. Since U.S. stocks bottomed in March 2009, their share prices have risen by 14% annualized. That figure is not total return; it is solely capital growth and thus is directly comparable to Manhattan’s 6.7% standard. Over the short term--the very short term, from Minuit’s perspective--U.S. equities have easily outshone Manhattan’s average results.

Simply by accepting a job, thereby becoming enrolled into a target-date fund, everyday Americans have substantially outperformed one of the savviest real estate deals every made, for more than a decade. Ironically, this has occurred even as the 401(k) system has been widely criticized for being inadequate to meet the country’s retirement needs. Perhaps so, but the markets have powerfully favored those who have participated.

Unsustainable
An inescapable observation is that, over the centuries, no entities have earned anything like Manhattan’s rate of return. Many possessed more than \$24 in the early 17th century. None today can afford to buy Manhattan. Appreciating by 6% or 7% annually, plus receiving ongoing income, may not seem a terribly ambitious goal. But achieving that return for several centuries, rather than merely for decades, has surpassed the abilities of any families--and businesses, too.

(It should be noted that all figures in this column are nominal. Therefore, they overstate Manhattan’s real returns. After inflation, the island’s annualized rate of capital growth has been under 5%. Less impressive yet!)

To paraphrase Abraham Lincoln, all people can earn double-digit returns some of the time, and some people can earn double-digit returns for all their times, but no success persists. If a family or organization could manage such a feat for multiple generations, it would eventually become as wealthy as a midsize country. But none have done so--including, it should be pointed out, Minuit’s employer, which expired on Dec. 31, 1799.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.