An Investment Lesson by MONOPOLY
When it comes to Monopoly, there is only one rule: cash flow is king!!
Sometimes it means you have to let immediate gains pass by, in order to save up your bullets to win big in the end. After all, market opportunity is largely a matter of luck, and you have to be prepared all the time. That is why you should only invest in locations that fall in the golden zone – the location that is most likely to give you maximum returns.
At the core of Monopoly, is real estate business and in real estate, it is always about “location, location, and location”. When playing Monopoly, the key is to buy assets located in the golden zone. So where is the golden zone?
I used to think that the most expensive ones (circled in red) are the best location to be in as the most expensive land, Mayfair, yields a rental return of 12.5% for site only; while the cheapest land, Old Kent Road, yields a mere of 3.33% for site only. However, if you also take into account the additional investment in building the hotel, you will find that the difference in return on investment is narrowed to 142% v.s. 119% respectively.
To help us decide whether the most expensive land is the golden zone, let’s consider the factor of traffic because the most expensive land may not necessarily attract the highest flow of people. Since players are using two dice to decide their move, the probability of landing on a single space can be worked out with the probability of getting 2 to 12 as below:
It is most likely players will move 5 to 7 spaces at each turn. But wait! There is also “go to jail” right before reaching the more expensive lands, lowering the chance of landing on Mayfair. Combining these two factors, there is more chance for players to end up landing on the spaces circled in blue.
High traffic, comparably high rental returns, and low investment, aren’t these the criteria investors are always look out for?
In reality, it is not as straight forward. It is much harder to identify “Old Kent Road”, where its high traffic is not already reflected in its price tag. So the lessons?
1. keep your eyes open for underdogs like “Old Kent Road”,
2.find ways to be the first to land on assets like “Vine Street”,
3. if something is expensive because of known valuable attributes like high traffic, it is unlikely the investment will generate any lucrative growth. On the contrary, this type of investment is more susceptible to economic downturns, and,
4. Don’t invest for vanity sake! We all know how much posher to say “I own a piece of Mayfair” then “I own a piece of Old Kent Road”. But please look at the numbers and be a smart investor.
*Price is quoted based on the UK edition of Monopoly before 2011. In the new edition, cost to buy Old Kent Road has been increased to $208m.
January 11, 2018
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