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.
Over time, assets increase in value based the cash flows they produce. Even something as simple as a savings account or savings bond becomes more valuable if it earning more cash, i.e., a higher interest rate. In investing, the most successful investments come from those companies that can generate growing cash flows. Iconic companies like Coca-Cola, Johnson & Johnson and IBM have been highly successful investments for decades because of the growth in cash flows.
Lesson Four – the Most Expensive Asset Is Not Always the Best
Most monopoly players want to own Park Place and Boardwalk since they 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.
Those who win at Monopoly, and investing in the long run, instead focus on the value gained for price paid. In investing, the best investments can often be tarnished companies trading at a bargain price. Owning Boardwalk and Park Place is not how you win at Monopoly; 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.
Lesson Five – 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.
The Bottom Line
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.