How Playing Monopoly Can Help You Manage Your Portfolio

Growing up, I was a huge fan of Monopoly. Today, I'm not ashamed to admit that I had my assistant run out and pick up a copy of the new Monopoly game, bring in an X-Box, and have some folks at headquarters play a game or two. This got me thinking about the importance of the underlying game. There is actually a tremendous amount of knowledge you can gain from understanding the probabilities, cost to value, and risk reward tradeoffs for certain properties. Later in life, these can be used as a rough guideline for stocks, as well.

(On a side note, I think the fact that we can sit at headquarters and play Monopoly as Wall Street continues to crash is the greatest selling point for the value investing approach to building wealth that we could ever give. Once our trades were executed today, this was how we spent our afternoon! As Warren Buffett has said, "What's the point of getting rich if you have to stare at ticker tape all day?")

Here, I have two copies of books that are germane to the topic. One is called Everything I Know About Business I Learned from Monopoly by Alan Axelrod. The other is called The Monopoly Companion: The Players' Guide. The former discusses the same concept as Benjamin Graham; e.g., "There is nothing sacred about price. The important issue is value ... The great lesson of an auction is not getting a steal, buying something on the cheap, or 'winning' against other bidders. No. The take-away lesson of the auction is that your goal is to get value." This is the concept that we discussed in the article How to Think About Share Price.

The other book details the statistical probabilities and payouts of each property group. This is comparable to discounting cash flows when calculating the intrinsic value of a stock or bond. In Monopoly, you know the cash flows you can expect based upon various house and hotel buildup levels and the probability of various players landing on your spots based upon the number of people playing, their current position on the board, and the layout of your properties. In stocks, or ownership of businesses in general if you have a small business, you have to fill in those numbers for yourself. How much can your retail store generate versus your investment cost? Much of that depends on the talent of you and your management team. In the case of stocks, it depends on your understanding of the market, cost structures, society, and dozens of other factors.

The point is, managing your portfolio should be fun, like a game of monopoly. I know the past few months have been rough, but with the right philosophical approach and a disciplined methodology for selecting your investments, times like these are when great fortunes are made. In Monopoly, the best values happen when your opponents are desperate and need cash. That's when you can buy their assets cheap. Why would shares of General Electric or Johnson & Johnson be any different?