The other day I was challenged to a game of Monopoly by my 12 year-old son, Harry. He’s new to the game and, of course, to the nuances of the financial world, so I saw this as a good opportunity to teach him a thing or two about some harsh realities, in a relatively non-threatening environment.
As the game progressed it became clear just how much he had to learn. For instance, whenever he landed on an unsold property for which he could not afford to pay cash, he would forego the opportunity. A discussion ensued about what “mortgage” means, the concepts of borrowing, security, interest payments and so on. As it’s only a game, you can even borrow without having to prove you can pay it back. Imagine that! Like “lo-doc” loans – easy, cheap money. Back up the truck!
Anyway, he thanked me for the information, and watched while I borrowed heavily and often, to amass an impressive spread. I negotiated the strategic, debt-funded acquisition of Euston Road to complete the light blue set, paying handsomely to my already cash rich opponent – all part of the fiendish plan of financial domination I had in mind. Borrowed again to stack key real estate with property developments, even though it meant foregoing income on the mortgaged properties. I must admit to feeling vaguely guilty for the harsh lessons the seasoned veteran was about to dish out to the babe-in-the-woods. But it’s only a game, right?
Harry meanwhile went on his way, picking up quality assets as and when he could afford them. His one and only foray into development was to save up enough cash to put a hotel on Mayfair. He didn’t seem to be bothered about the highly concentrated nature of his portfolio, nor did he ask me about capitalisation rates and discounted future cash flows as a function of development costs – he just went ahead and did it.
Which suited my game plan just fine, and I was not unduly concerned about the 1 in 40 risk of being wiped out – until it happened, that is. At which point I had $103 in cash, owed the bank most of my vital organs, and now my new landlord wanted $2,000. Talk about a crash! My thoughts by now were not so much of the eerie parallels with real-life investor behaviour, but rather how I could write him out of my will. But then it is only a game – isn’t it?
On the bright side, at least he did learn a lesson or two. As we packed away the remains of my crumbled empire, Harry said (and I’m not making this up) “There’s only one thing now that I don’t understand about finance. That’s the sharemarket.”
Of the many possible responses, under the circumstances I went with:
“I think you’d better ask your mother.”
And the moral of the story? Well, perhaps there are two:
- As with that other timeless classic fable – The Tortoise Won!
- It’s about returns AND risk. Chasing stellar returns is all well and good, but can come to nought if you don’t respect and cover the downside risk.