Monopoly - lessons

Monopoly - lessons

Charles Darrow of Philadelphia developed the game in 1933 and sold it to Parker Brothers on 19th March 19 1935.
Following its 81st birthday here are some lessons monopoly teaches us about Finance and Investing.
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Monopoly has been a classic board game for decades. It's a real estate trading game that nearly everyone plays for fun and a chance to be a pretend real estate tycoon. But if you've played Monopoly long enough, you quickly realize 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 not only help you increase your chances of winning the board game, but also increase your chances of having a better and useful understanding of prudent financial and investment principles.

-) Lesson One - Always Keep Cash on Hand
By far, this is perhaps the most important lesson in the both the game and the financial world. To win in Monopoly you have to the be last player left, in other words, the last one to have money. So if you aimlessly move around the Monopoly board buying up everything in sight, when the time comes to pay your financial obligations, you are likely to run out of cash. No cash means you have to start selling off the properties (assets) you acquired at a deep discount to what you paid for them. In the game, you are allowed to mortgage them at a discount to face value. Once this process happens, unless you get lucky, it's only a matter of time before you go bankrupt.

-) Lesson Two - Be Patient
To win at Monopoly you have to be patient and have a game plan. You just can't win by buying every piece of real estate you land on; you have to have a general approach of how you want to proceed. If you are impatient and start buying every piece on the board you land on, you will quickly find yourself out of money and, thus, unable to do anything but hope for the best. Therefore, you have to be patient and know when to buy and when to take a pass.

Similarly, if you just buy without discipline when investing, you will be placing your outcome on the hope that the market behaves nicely. Successful investors don't invest based on hope, they invest with a disciplined approach. Patience is a very integral part of that approach.

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

-) Lesson Three - Focus on Cash Flow
Monopoly is a simple game: you start off with some money and your goal is to be the last player standing with money. The way you win in Monopoly is by collecting rents on property, 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 railroads; if you can own all four of them, you have put yourself in a very good position. With each railroad costing $200, by owning all four you collect $200 in rent or a 25% return. I realize this may be a very bizarre way to look at a game, but this is precisely why Monopoly offers some valuable financial and investing lessons.

In investing, the most successful investments come from those companies that can generate growing cash flows. Iconic companies like Coca-Cola or Johnson & Johnson have been highly successful investments for decades because of the growth in cash flows.

-) Lesson Four - Don't Put All Your Eggs in One Basket
You won't win much in Monopoly by just owning one property on the board and loading it up with hotels. It's also hard to win if you try and buy everything on the board and spread yourself too thin. Occasionally you can get lucky and have every opponent land on your property, but usually the winner is someone who spreads out his or her properties throughout the board and has multiple chances at capturing rents.

The same principle applies in investing. If you bet everything on one or two stocks, you are exposing yourself to a potential wipe out if something goes wrong. At the same time, you can dilute your gains by trying to own 100 different stocks. Diversify intelligently - studies have shown that a portfolio gains no additional diversification benefits after 15 to 20 securities. So don't just bet on one or two assets or try and keep up with 50 assets.

Intermediate remark:
Of course, a board game like Monopoly shouldn't be taken as a thorough education in finance and investing, as it certainly has it's flaws. However, it does have some valuable lessons to teach, such as to spread yourself out across the board intelligently, keep cash on hand, focus on cash flows, be patient and pay attention to price. Use these five lessons as a guide post to more intelligent and successful investment decisions. More lessons (from the view of a game-designer):

Lesson 5) Make the rules simple and unambiguous
In life, the rules always change: Banks suddenly increase the deposit levels required for free checking; schools alter the course requirements for graduation. By offering known and unvarying sets of options and outcomes, games can provide real comfort - especially when the rules are also kept simple. Which brings us to lesson 6:

Lesson 6) Give ’em chances to come from behind
One of the trickiest aspects of game design is achieving just the right balance of skill and luck. If a game uses only skill, you have chess. And if it involves only luck, you have a child’s game. As this implies, different proportions of chance work for different levels of player maturity and intellectual involvement.

It’s very tough to make a game that can satisfy both those who prefer casual games of luck and those who prefer to use their heads. In 1999 „Monopoly: The Card Game“ got created with the aim of providing the emotional high points of the original game but in much less time. Given Monopoly’s wide appeal, it was known that a version was missing that kids could find fun to play but that adults could also approach with sophisticated reasoning and decision making.

A friend of one game-designer once commented, “The reason Monopoly endures is that it’s 75% skill and 75% luck.” What he meant was, if you lose, you can blame it on luck, and if you win, you can claim to be a great negotiator and cunning strategist. (For more on how to win at Monopoly, see the final remarks on “Confessions of a Monopolist.”)

More Lessons/Confessions of a Monopolist:

Managers may benefit from learning some of the rules of games and game design. Undeniably, though, game players benefit from learning the disciplines of management. In particular, the spoils in Monopoly routinely go to the players who…

-) take a close look at return on investment.
Casual players don’t know this, but the 28 properties around the Monopoly board are not equally valuable in terms of ROI. Boardwalk and Park Place, which many people regard as the most precious, actually are not. It turns out that the oranges and reds have the highest ROI and are the best properties to own. In part, it’s because there are three of each rather than two, so the odds of landing on these color groups are better. But these reasonably priced properties have something even stronger going for them: They’re perfectly positioned beyond the corner where jail is located. The odds of any player’s going to jail are reasonably high over the course of the game - and when that player comes out of jail, the chances of landing on an orange or a red are good. By contrast, the green properties, which lie just after the “Go to Jail” space, are far less likely to be landed on during the game. And they’re expensive to boot.

-) ...know the art of the deal.
A player rarely acquires all the properties of a color group by actually landing on them. So a trade is frequently required to own a complete color group. This fact alone proves the merit of buying every unowned property you land upon. Then you’ll have property to trade to get what you want. Cash alone is insufficient to get a good deal. The first monopoly is a big event in the game. It skews the expected cash flow in favor of its owner. If the monopoly lies on the second or third side of the board, it may be enough to bankrupt opponents who haven’t faced reality and traded among themselves to establish competing monopolies.

-) ...make no enemies.
Having material to trade is essential, but so is your conduct if you are to come out ahead in a trade. There’s an adage in game playing: Be the kind of player to whom others won’t mind losing. No one wants to lose, but if you’re going to, it might as well be to someone who’s gracious, considerate, diplomatic, and knowledgeable. Nobody likes to lose to a browbeater, a player quick with insults, or a know-it-all.

A casual player of Monopoly might think that it’s a game of chance and that the winner is determined by rolls of the dice. Watching the best players in the world in tournament play has shown it’s not. The winners are actually masters of strategy and negotiation. They know how to minimize the impact of bad luck - and to put themselves in the way of an undue share of lucky breaks.

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