5 lessons of monopoly finance and investment

For more than 100 years, Monopoly has been a classic board game. This is a real estate trading game. Almost everyone plays this game and has the opportunity to become a pretend real estate tycoon. However, if you play Monopoly for long enough, you will soon realize that this game provides many financial wisdom and lessons that can be applied to the real world of finance and investment.

Here are five valuable lessons that will not only help you increase your chances of winning the board game, but also increase your chances of better understanding of prudent financial and investment principles.

1. Always keep cash in hand

So far, this is the most important lesson in the gaming and financial world. To win in Monopoly, you must be the last remaining player, in other words, the last rich player. Therefore, if you walk around aimlessly in the Monopoly board and buy everything in front of you, you may run out of cash when you need to pay financial obligations. No cash means that you have to start selling the property (asset) you bought at a significantly discounted price than the price you paid. In the game, you can mortgage them at a discount on face value. Once this happens, unless you are lucky, it is only a matter of time before you go bankrupt.

The same principle applies to financial affairs in the real world. The consequences that occur when the United States has no cash during the recession are among the highest. When the Great Depression hit, people were crazy about spending money because of their addiction to credit. However, when the real estate market crashed and the U.S. banking crisis broke out, those without cash were destroyed. The monopoly effect occurred-without cash, people had to “sell” what they owned at a steep discount. Unable to pay the mortgage, people are forced to sell their homes at prices much lower than they paid, or worse, the lenders cancel the foreclosure of the property. Any equity has been erased.

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The same consequences have been suffered to an astonishing degree in the stock market. When the credit market is in trouble, many investors scramble to raise cash. Their only option is to sell securities at any price. This demand for cash caused a massive sell-off, leading to a sharp drop in the market in 2008, and ultimately leading to the loss of large amounts of investable assets by good and hardworking people. On the other hand, people with cash have the opportunity to purchase assets-stocks, real estate, bonds, for a fraction of less than their value. In the end, they won the game and made the most money.

2. Be patient

To win in Monopoly, you must have patience and make a game plan. You usually cannot win by buying every piece of real estate that you own. You must have a general method on how to proceed. If you are impatient and start buying every piece of the board you land on, you will soon find yourself out of money. Therefore, you must be patient and know when to buy and when to pass.

Similarly, if you buy without discipline when investing, you will hope that the market will perform well. Successful investors will not invest according to hope, they will invest in a disciplined manner. Patience is an integral part of this approach.

During the Internet boom in the late 1990s, Warren Buffett was ridiculed for not investing in Internet companies, while speculators around him were reaping triple-digit returns. The lucky few come in and out at the right time. However, for most people, the result is painful loss. Buffett has been patient for years, while everyone else is chasing Internet stocks. In the end, when the market and investors’ funds were exhausted, speculative investment quickly collapsed, eliminating most of the impatient and disciplined investors.

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3. Focus on cash flow

Monopoly is a simple game: you start with some money, and your goal is to become the last player to hold the money. The way you win among monopoly is to collect property rent or cash flow.

Not many people know this, but the most valuable asset in the Monopoly sector and the best cash flow are the four major railways; if you can own these four, you are in a very advantageous position. Each railroad costs US$200, and with all four railroads, you can get a rent of US$200 or a 25% return. This may be a very strange way of looking at games, but this is why Monopoly provides some valuable financial and investment courses.

Over time, the value of assets will increase based on the cash flow they generate. If you earn more cash (that is, higher interest rates), even simple things like savings accounts or savings bonds will become more valuable. Many of the most successful investments come from companies that can generate growing cash flow. For decades, iconic companies such as Coca-Cola (KO), Johnson & Johnson (JNJ) and IBM (IBM) have made very successful investments due to the growth in cash flow they generate.

4. The most expensive asset is not always the best

Most monopoly players want to own Park Place and Boardwalk because they have the highest expenditures. But they are also the most expensive parts to maintain. Many people lose out among Monopoly because they have the most expensive parts because they don’t care about cost, only cash flow. Focusing on cash flow without considering the cost of obtaining these cash flows is playing the game blindly.

Those who win the monopoly and make long-term investments, instead focus on the value gained from the price paid. In investment, the best investment is often a company that suffers from low-price transactions. Owning Boardwalk and Park Place is not your way to win in Monopoly; you win the most money you make. In investing, you win by buying low and selling high. When you focus on the most expensive asset, you are likely to overpay and let yourself bear the loss.

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5. Don’t put all your eggs in one basket

Just owning a property on the board and loading it into a hotel, you won’t win much in Monopoly. If you try to buy everything on the board and spread yourself too thin, it will be difficult to win. Sometimes, you may be lucky to let every opponent land on your property, but usually the winner is the one who has spread his or her property across the board and has multiple opportunities to get rent.

The same principle applies to investment. If you place all your bets on one or two stocks, if something goes wrong, you will face potential losses. At the same time, you can dilute your earnings by trying to own 100 different stocks. Diversify smartly; research shows that portfolios holding 15 to 20 securities will not receive additional diversification gains. Don’t just bet on one or two assets, or try to keep up with 50 assets.

Bottom line

Of course, a board game like Monopoly should not be regarded as a thorough education in finance and investment, because it certainly has its flaws. However, it does have some valuable lessons to teach: spread yourself out wisely, have cash on hand, pay attention to cash flow, be patient, and pay attention to prices. Use these five lessons as a guide for more informed and successful investment decisions.


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