I’m pretty sure most, if not all, of us have played one of the oldest board games in the world, Monopoly. Many of us have made up our own rules along the way.
Now Hasbro, makers of the game are inviting Facebook fans to decide on 10 house rules in future editions of the game. Details are available at facebook.com/monopoly
And while some of the rules may be changing, Monopoly still has some valuable lessons to teach us that can help us become better investors.
Having cash on hand
The aim of the game is to acquire properties, and staying in cash means you cannot win it. But spend too much and you may struggle with not enough cash flow. Just like investing, if you are fully invested and have no cash, it’s more difficult to take advantage of opportunities that might come along, such as buying a stock that may be selling for a cheap price.
If markets around the world crashed tomorrow, thanks to my cash balance, I’d definitely be taking a closer look at some of the high quality healthcare stocks on the ASX like CSL Limited (ASX: CSL), Resmed Inc (ASX: RMD) and Cochlear Limited (ASX: COH).
Owning just one set of Monopoly properties is unlikely to win you the game. Owning a number of sets is much more likely, especially if they are positioned on different parts of the board. That gives the player the opportunity to benefit multiple times and at different times. Likewise in investing, owning just the big four banks may be profitable, but other investors may well be leaving you behind, by owning diversified portfolios including some fast growing stocks like Nearmap Ltd (ASX: NEA), which is up 345% in the past 12 months.
Wealth creation takes time
One round of the board in Monopoly is not going to win you the game. Trading properties is also unlikely to win the game, but taking a longer approach by building up a portfolio of properties is the most likely approach to give you the best chance of winning the game. It’s much like buy and hold investing which takes a long-term approach, letting the stocks you own do the work for you.
Taking on too much debt can send you bankrupt
Mortgaging some of your properties allows players to borrow cash from the bank. But taking on too much may mean you have little income in the meantime, and then even a small hiccup can send you bankrupt. In investing, we like companies that have very little or no debt. Ideally, we’d like them to have a net cash position, which gives them more flexibility and some protection from events such as the Global Financial Crisis. That’s one of the biggest risks with Fortescue Metals Group Limited (ASX: FMG). Until Fortescue can pay down its debt to a more reasonable level, it is a high risk leveraged play on the iron ore price remaining fairly high for a number of years.