What does Monopoly teach us about investing?

Talkin go money

Monopoly has been a classic board game for over 100 years. It's a real estate trading game that almost everyone plays for fun and a chance to be a sham real estate tycoon. But if you've played Monopoly long enough, you will quickly find that the game offers a lot of financial wisdom and lessons that can be applied to the real world of finance and investing. Below are five valuable lessons that will not only help you increase your chances of winning, but also increase your chances of having a better and useful understanding of prudent financial and investment principles.

Lesson 1 - Always have money on hand By far this is perhaps the most important lesson in gaming and in the financial world. To win in Monopoly, the last player must be left, in other words, the last one to have money. So if you move aimlessly through the Monopoly board and buy up everything in sight when the time comes to pay your financial obligations, you are likely to run out of money. No cash means you have to start selling the real estate (assets) you have acquired with a high discount that you paid for them. In the game, you are allowed to mortgage them at a discount on their face value. Once this process occurs, unless you are lucky, it is only a matter of time before you go bankrupt.

The same principle also applies in the financial world. The United States got a front row seat to the consequences of the recession when cash was not available. When the Great Recession hit, people had been spending money like crazy thanks to their dependence on credit. But when the real estate market went bust and the US banking crisis erupted, those with no money were decimated. The Monopoly effect took place: without cash, people had to "sell" what they owned at steep discounts. Unable to make mortgage payments, people were forced to sell their homes for significantly less than what they paid for them, or worse, the lender who was locked out on the property. All equity was wiped out.

The same consequences have been suffered to an astonishing extent in the stock market. When the credit markets were seized, many investors battled for cash. The only option they had was to sell stocks at any price. This need for cash created an avalanche of sales that sparked the huge market decline in 2008 and ultimately resulted in good, hardworking people losing most, if not all, of their investable assets. On the flip side, people with cash had the option of buying assets - stocks, real estate, bonds - for fractions of what they were worth, and in the end they won the game and made the most money.

Lesson Two - Be Patient To win at Monopoly, you need to be patient and have a game plan. You can't win by buying every piece of land you land on; You need to have a general approach to how you want to go about it. If you get impatient and start buying every piece on the board that you land on, you will lose money quickly and therefore will be able to do nothing but hope for the best. That is why you need to be patient and know when to buy and when to take a pass.

If you simply buy with no discipline when investing, you will put your outcome on the hope that the market will behave well. Successful investors don't invest on the basis of hope; they invest with a disciplined approach. Patience is an integral part of this approach.

During the internet boom of the late 1990s, Warren Buffett was ridiculed for not investing in internet companies while speculators around him were making triple-digit profits. A lucky couple got in and out at the right time; For the vast majority, however, the result was painful losses. Buffett exercised patience for years while everyone else hunted internet stocks. In the end, when the market and investors ran out of money, the bottom quickly collapsed, wiping out the majority of investors who weren't patient and disciplined enough.

Lesson 3 - Focus on Cash Flow
Monopoly is a simple game: you start with some money and your goal is to be the last player to come out with the money. The way you win at Monopoly is by collecting rents for real estate or cash flow. Not many people know this, but the most valuable properties on the monopoly board, with the best cash flow, are the four railways; If you can own all four, you will be in a very good position. With each railroad costing $ 200 by owning all four you collect $ 200 in rent or 25% return. I know this can be a very bizarre way to watch a game, but for this very reason, Monopoly offers some valuable financial and investment lessons.

Over time, assets grow due to the cash flows they produce. Even something as simple as a savings account or savings account becomes more valuable as it makes more money, i.e. e. a higher interest rate. The most successful assets, when it comes to investments, come from those companies that can generate growing cash flows. Iconic companies like Coca-Cola, Johnson & Johnson and IBM have invested very successfully for decades due to growing cash flow.

Lesson Four - The Most Expensive Fortune Isn't Always the Best Most monopolists want to own Park Place and Boardwalk because they have the largest payouts. But they are also the most expensive parts to maintain. Many people lose at Monopoly by owning the most expensive pieces because they don't care about costs, just cash flow. Focus on cash flow without considering the costs paid to achieve those cash flows by playing the blinders game.

Those who win at Monopoly and invest long term focus instead on the value for the price paid. When investing, the best assets can often be bad companies that trade for a bargain price. Owning Boardwalk and Park Place isn't how you win at Monopoly; You win by making the most money. You gain on the investment by buying low and selling high. If you focus on the most expensive assets, the chances are that you will overpay and prepare for losses.

Lesson Five - Don't Put All Your Eggs in One Basket You don't gain much in Monopoly by just owning one property on the board and charging it with hotels. It's also hard to win trying to buy everything on the board and spread out too thinly. Occasionally you can get lucky and land every opponent on your property, but usually the winner is someone who spreads his or her property across the field and has multiple chances of winning rentals.

The same principle applies to investments. If you bet everything on a stock or two, you are exposing yourself to a potential slip-up if something goes wrong. At the same time, you can dilute your profits by trying to own 100 different stocks. Diversify Smartly - Studies have shown that after 15 to 20 stocks, a portfolio has no additional diversification advantage. So don't bet on just one or two assets or try to keep up with 50 assets.

The bottom line Of course, a board game like Monopoly shouldn't be construed as a thorough education in finance and investing as it is sure to have shortcomings. However, it does have some valuable lessons to teach how to spread smartly down the line, have cash on hand, focus on cash flows, be patient, and watch out for the price. Use these five lessons as a guide to making smarter, more successful investment decisions.