5 Lessons Monopoly Teaches Us About Finance And Investing
Monopoly has been a classic board game for over 100 years. 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 real estate investing wisdom and financial insights 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.
The same exact principle applies in real-world financial matters. The United States got a front row seat to the consequences that happened during the recession when cash is not available. When the Great Recession hit, people had been spending cash like crazy, thanks to an addiction to credit. Yet when the housing market went bust and the U.S. banking crisis erupted, those without cash were decimated. The Monopoly effect took place: without cash, folks had to “sell-off” what they owned at steep discounts. Unable to make mortgage payments, people were forced to sell their houses for significantly less than what they paid for them, or worse, the lender foreclosed on the property. Any equity was wiped out.
The same consequences were suffered in the stock market to a staggering degree. When the credit markets seized, many investors scrambled to raise cash. The only option they had was to sell securities at any price. This need for cash created an avalanche of selling that created the huge market decline in 2008 and ultimately led to good, hardworking people losing most, if not all, of their “investable “assets. On the other hand, the people who had cash were given an opportunity to buy 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 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.
Stay tuned for Part 2 on Monday. Have a great weekend.
To Your Wealth
Gord
