For more than a century, Monopoly has been a beloved board game. Almost everyone enjoys playing this real estate trade game, which gives them the opportunity to pretend to be real estate moguls.
However, after playing Monopoly for a while, you rapidly come to the conclusion that the game imparts a great deal of financial knowledge and concepts that are applicable to the actual world of investment and banking.
Here are five insightful lessons that will not only improve your chances of winning the board game but also improve your knowledge of wise financial and investment practices.
1. Always Have Cash on Hand
This is by far the most significant lesson in the financial world as well as the game. Being the final player standing, or the last person with money, is how you win in Monopoly. Therefore, you are likely to run out of money when it comes time to pay your debts if you play Monopoly aimlessly and buy up everything you see.
Lack of cash forces you to begin liquidating the properties (assets) you have purchased at a significant discount to their original cost. You can mortgage them in the game at a lower price than their face worth. It’s only a matter of time till you become bankrupt after this process, unless you get lucky.
When it comes to actual financial matters, the same exact idea holds true. The implications of not having access to cash during a recession were clearly seen in the United States. Due to a credit addiction, people had been spending money like crazy before the Great Recession struck. But many without cash were wiped out when the housing bubble burst and the US banking crisis occurred. The Monopoly effect occurred, forcing people to “sell-off” their possessions at significant discounts in order to get cash. People who couldn’t afford their mortgages were forced to sell them for far less than what they originally paid for them, or worse, the lender foreclosed on the home. Equity was completely lost.
To a startling extent, the stock market experienced the same outcomes. Many investors rushed to raise money when the credit markets crashed. Selling securities at any price was their only remaining alternative. Due to their desperate need for money, many sold their possessions in a frenzy that precipitated the severe market fall of 2008 and cost many decent, industrious people a sizable portion of their investable wealth. Conversely, those with cash on hand had the chance to purchase assets for a fraction of their true value, such as bonds, equities, and real estate. They ended up winning the game and taking home the biggest prize.
2. Show Patience
You need to have a plan and be patient in order to win at Monopoly. Purchasing every available piece of real estate is typically not a winning strategy. You need to have a broad idea of how you want to go. You’ll run out of money fast if you buy every piece on the board that catches your eye out of impatience. As a result, you must exercise patience and discern when to make a purchase and when to pass.
In the same way, investment depends on disciplined buying; otherwise, your results are dependent on the market’s good behavior. Investing with discipline is the hallmark of successful investors; hope is not their investing philosophy. That strategy heavily relies on patience.
Warren Buffett faced mockery in the late 1990s Internet boom for passing over Internet startups to invest in while others around him made triple-digit profits as speculators. A fortunate few were in and out at the ideal times. But the majority suffered significant losses as a result.
For years Buffett was patient while everyone else chased Internet stocks. Ultimately, speculative investments crashed hard when investors and the market ran out of money, wiping out most of the investors who hadn’t been patient and disciplined enough.
3. Pay attention to cash flow
The object of the straightforward game Monopoly is to be the last person remaining with money when you start off with some. In Monopoly, the strategy to win is to gather cash flow, or rents on real estate.
Unbeknownst to many, the four railroads are the most valuable properties on the Monopoly board and have the highest cash flow; if you can acquire all four, you will be in a very strong position. Considering the $200 cost of each railroad, you can get a 25% return or $200 in rent if you buy all four. Although this may seem like a very strange way to view a game, Monopoly actually teaches some important lessons about investing and money management.
Assets gain value over time as a result of the cash flows they generate. Even something as basic as a savings bond or account increases in value as it generates more income (i.e., a greater interest rate). Companies that are able to provide increasing cash flows are often the source of the most profitable investments. Because of the steady increase in cash flows that iconic corporations like IBM (IBM), Johnson & Johnson (JNJ), and Coca-Cola (KO) generate, they have been extremely profitable investments for many years.
4. The Best Asset Isn’t Always the Most Expensive
Due to their larger prizes, Park Place and Boardwalk are the most sought-after properties among monopoly players. Nevertheless, the cost of maintaining them is also the highest. Having the most expensive pieces in Monopoly helps a lot of individuals lose since they only consider cash flow rather than cost. Playing the game with blinders on is concentrating on the cash flow while ignoring the costs incurred to get those cash flows.
Those that succeed at investing and Monopoly, on the other hand, concentrate on the value acquired relative to the cost. The finest purchases in the stock market are frequently tarnished enterprises that are selling at a discount. In Monopoly, winning doesn’t come from owning Boardwalk and Park Place; instead, it comes from making the most money. Buying low and selling high is the winning strategy in investing. The likelihood is that you are overpaying and putting yourself up for losses when you concentrate on the priciest investments.
5. Avoid Putting Everything in One Basket
Owning only one property and packing it full of hotels won’t get you very far in Monopoly. Spreading yourself too thin and trying to buy everything on the board makes it difficult to win. Every opponent may land on your property on rare occasions, but the victor is typically the player who distributes their homes over the board and has several opportunities to collect rent.
When investing, the same rules hold true. You run the risk of losing everything you invest in if you place all of your money on one or two stocks. Attempting to purchase 100 different stocks at the same time can dilute your gains. Be wise when you diversify; research indicates that a portfolio stops benefiting from additional diversification after 15 to 20 securities. Don’t try to keep up with 50 assets or only wager on one or two.
The Final Word
Of course, with its many shortcomings, a board game like Monopoly should not be considered a comprehensive instruction in banking and investing. It does, however, offer some important lessons to learn: be patient, spread yourself thin across the board, focus on cash flows, maintain cash on hand, and pay attention to price. Apply the knowledge from these five lessons to make wiser and more profitable financial choices.
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