Have you ever played board games with your friends?
Then you surely know about Monopoly. Nearly everyone has played it.
Monopoly has been a classic for over 100 years.
If you’ve played Monopoly long enough, you quickly realize that the game offers a lot of financial lessons that can be applied to the real world of finance and investing.
Monopoly has a lot to teach entrepreneurs about starting a successful business.
Of course, a board game like Monopoly shouldn’t be taken as a thorough education in finance and investing. However, it does have some valuable lessons to teach.
Below are worthful financial and investing lessons that not only help you increase your chances of winning the board game, but also increase your chances of having a better understanding of prudent financial and investment principles.
1. Risks should be taken early whenever possible.
In Monopoly, it’s smart to buy as many properties as possible from the start to increase your chances of owning at least one full set of the same colored properties before the game is over. Similarly, in business, those who start investing earlier often do better in the long run.
2. Always Keep Cash on Hand
By far, this is the most important lesson in both the game and the financial world. Despite how profitable investment may seem, it’s crucial to keep a financial cushion, as you never know how the game, or life, will turn.
To win in Monopoly you have to be the last player left, in other words, the last one to have money. But there are taxes, penalties, unexpected trips to jail and all sorts of uncertainties that pop up.
So if you move around the Monopoly buying up everything you see, when the time comes to pay your financial obligations, you are likely to run out of cash.
Money should be set aside for uncertainties.
No cash means you have to start selling off the properties (assets) you acquired at a deep discount to what you paid for them. Once this process happens, unless you get lucky, it’s only a matter of time before you go bankrupt.
Real-life business management is no different. You have to keep money set aside for unforeseen expenses.
The same exact principle applies when it comes to your finances.
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. Unqualified to make mortgage payments, people were forced to sell their houses for significantly less than what they paid for them.
3. Don’t Put All Your Eggs in One Basket
With a large variety of properties, your aiming for more streams of revenue and minor your chance of failing because one investment has gone bad.
Everyone wants top-notch properties. But, when it comes to investing in anything – whether it’s a product line, a supplier, or, in some cases, employees – the more variety, the better.
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. You spread yourself too thin.
Diversification is key.
Occasionally, you can get lucky and have every opponent land on your property, but usually, the winner is someone who spreads out his properties throughout the board and has multiple chances at contracting rents.
The same principle applies to investing. If you bet everything on one or two stocks, you are exposing yourself to be wipeout if something goes wrong. At the same time, you can weaken your gains by trying to own 100 different stocks.
Diversify intelligently; Don’t just bet one or two assets, instead try and keep up with 50 assets.
4. Negotiation and persuasion ability are essential.
There are times in Monopoly when a trade is necessary to get ahead. At the same time, you may run up against an owner of a property you want who is benefiting from it and doesn’t want to leave it. Your task then is to convince the owner that what you have to offer in return will somehow be more beneficial. Seeing both sides and moving around what another player wants and demands are all skills that come into play in many business settings.
5. Focus on Cash Flow
Monopoly is a simple financial and investing 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 a 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. 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.
Over time, assets increase in value based on the cash flows they produce. Many of the most successful investments come from those companies that can generate growing cash flows. Iconic companies like Coca-Cola or IBM have been highly successful investments because of the growth in cash flows they produce.
6. The Most Expensive Asset Is Not Always the Best
Most monopoly players want to own the properties that have the biggest payouts. But they are also the most expensive pieces to maintain. Many people lose at Monopoly by owning the most expensive pieces because they don’t pay attention to cost, only cash flow. Focusing on the cash flow without taking into account the cost paid to attain those cash flows is to play the game with blinders on.
Being able to evaluate the return on investment is essential in the business world and in Monopoly. In the game, buying lots of properties can yield great results, but you should always know at what cost. You shouldn’t make purchases blindly or without having an idea of what your next move will be. Will buying a lesser property give you the funds you need if you are low on cash? Should you resist and wait for something more lucrative? Just the same, when making business decisions, you have to assess your presumable gain as well as the expense and time needed to get it.
Always Understand ROI
Those who win at Monopoly are finance and invest in the long run, focusing on the value gained for the price paid. In investing, you win by making the most money. In investing, you win by buying low and selling high. When you focus on the most expensive assets, odds are you are overpaying and setting yourself up for losses.
7. Be Patient
To win at Monopoly you have to be patient and have a game plan. You have to have a general approach to 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. 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 spending, 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 wide 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 speculative investments came crashing down quickly, wiping out the majority of investors who weren’t patient and disciplined enough.
Instant gratification isn’t always what’s best.
Sometimes, the fastest decisions aren’t the wisest ones. It’s exciting to make progress early in the game, but don’t make bad choices just because you want to feel like a winner. In Monopoly and in business, the true winner is the one whose overall decision-making leads to the best outcome.
Use these lessons as a guidepost to more smart and successful investment decisions.
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