In 1803 the United States and France concluded the Louisiana Purchase. There are many lessons in that agreement.
For those with faint memory, the deal is a purchase by the United States that involved approximately 828,000 square miles of territory. That is an area about double the size of Spain and France together. The price was $15,000,000. A considerable sum at the time. One for which President Thomas Jefferson was roundly criticized.
Lesson 1: Sometimes the buyer wants to sell and that can be an advantage for the purchaser. France had, just three years before, reacquired the space as part of a settlement that Spain made with Napoleon. While valuable for empire development, Napoleon had more pressing issues. Principally a war with England. So sell. You do not get highest value when you must sell or if it is convenient to sell. Notice your estate plan tool that acquires necessary liquidity.
Lesson 2. Do not anchor your intent. The United States started out trying to buy New Orleans so they could control shipping on the Mississippi. France offered to sell New Orleans but on condition that the United States buy the attached vacant lot. Notice that the final deal is quite frequently not as it was anticipated. Be prepared to negotiate more than just price.
Lesson 3. It looks cheap now, but it may have been fair at the time. People are overwhelmed with large numbers. Suppose we make the numbers smaller. There are about 530,000,000 acres in the purchase, so roughly $0.03 per acre. Assume that, on average, all of that land (excluding improvements) the pasture and plains and woodlots, the mountains, cities and parks, is worth $10,000 per acre today. Notice that is about 18.3 doubles in 212 years. Roughly 6% rate of return. More accurately 6.2%. How hard would it be to make 6% over a long time? You might want to rethink the 9% assumption in your retirement plan.
Lesson 4. Everything is a bargain. As with the central United States, if you keep something a long time, you will make it into a large number. Compound interest tends to do that. When you do your planning, start early. The money is not all that important but the time is. In the same way, get out of debt quicker. Compound interest is capable of working against you too.
Financial literacy requires you recognize that your intuitive response to large numbers built over a long time will mislead. Learn to challenge those intuitive responses. The Rule of 72 will help. Learn it and use it to make incomprehensible numbers meaningful.
Notice three things about accumulating money.
- The number of doubles depends on the rate of return and the time invested. You can control the time.
- The last double adds as much as all the other doubles combined. Start early.
- Losing money costs time. More time and a less risky rate of return may work better for you.
Common sense requires a realistic vision of how money grows. Try to build that.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.