5 Lessons in Finance and Investing from Monopoly
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 pretend to be a 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 your chances of having a better understanding of prudent financial and investment principles.
1. Always Keep Cash on Hand
By far, this is the most important lesson in both the game and the financial world.
To win in Monopoly you have to be the last player left — or 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 have acquired at a big discount to what you paid for them. Although you are allowed to mortgage the property at a discount, once that happens, it’s only a matter of time before you go bankrupt.
The same principle applies to real-world financial matters. For example, when 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.
Those unable to make mortgage payments were forced to sell their houses for significantly less than what they paid for them, or worse, foreclosed on the property. Any equity was wiped out. The same consequences are seen in the stock market to a staggering degree.
For example, in the 2008 market crash, many investors scrambled to raise cash, by selling securities and created an avalanche that led to the huge market decline.
Ultimately, good, hardworking people ended up losing a significant amount of money and other assets.
On the other hand, those who had cash in hand had the opportunity to reinvest in assets – stocks, real estate, bonds – for fractions of what they were worth. In the end, they won the game.
2. Be Patient
To win at Monopoly you have to be patient and have a game plan. You usually can’t win by buying every piece of real estate you land on.
You must 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.
Be patient and know when to buy and when to pass. Similarly, if you just buy without discipline, you are hoping that the market will move in your favor. Successful investors don’t invest based on hope, they invest with a disciplined mind, and patience is an integral part of that process.
3. 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.
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.
Even something as simple as a savings account or savings bond becomes more valuable if it is earning more cash (i.e., a higher interest rate).
Many of these successful investments come from companies that generate growing cash flows, such as Coca-Cola (KO), Johnson & Johnson (JNJ), and IBM (IBM).
These companies have been highly successful because of the growth in cash flows they produce over the decades.
4. 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. They 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 consideration the cost paid to attain them, is to play the game with blinders on.
Eventually those who win at Monopoly, or investing in the long run, focus on the value gained for the price paid.
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, the odds are you are overpaying and setting yourself up for losses.
5. Don’t Put All Your Eggs into One Basket
You won’t win much in Monopoly by just owning one property, and loading it up with hotels.
It’s also difficult to win if you try and buy everything on the board and spread yourself too thin.
Occasionally, you will get lucky and have every opponent land on your property, but usually, the winner is someone who spreads his or her properties throughout the board and has multiple chances of getting rents.
The same principle applies to investing. If you bet everything on one or two stocks, you are exposing yourself to a potential wipeout if something goes wrong.
At the same time, you can dilute your gains by trying too many stocks.
Diversify intelligently; studies have shown that a portfolio gains no additional benefits after 15 to 20 securities. Don’t just bet on one or two assets, or keep up too many assets.
The Bottom Line
Of course, a board game like Monopoly is not a real-life education in finance and investing. However, it does have some valuable financial lessons to teach you, which include — how to spread yourself across the board intelligently, keeping cash on hand, focusing on cash flows, being patient, and paying attention to the price.
Use these five lessons as a guidepost to make more intelligent and successful investment decisions in the future.