Two weeks back I was invited to play Robert Kiyosaki's CASHFLOW 101 board game by a friend who works at Walton International.
The board game tries to compress 50 years of economically active human life into one-and-a-half hours. At the start of the game, we were asked to choose the goal we would like to have at the end of our working life.
The choices include setting up a charity foundation, cruising the world in your yacht or retiring in your beach front property, among others. Everyone starts with the same income and expenses.
Net income, after paying off expenses each month, is about $2,000. Everyone also starts with about $2,000 cash in hand. Just like Monopoly, every time you pass certain squares, you get your net income of about $2,000.
How fast you move, and which square you land on, depends on the roll of the dice. If you land on an Opportunity square, you get the chance to buy something. You can opt for a big or a small opportunity.
Small opportunities involve small investments that do not require a significant outlay. A big opportunity means a big investment. Among the squares are life's possible events, including retrenchment and childbirth.
Should you land on the retrenchment square, you get no income for a couple of rounds. And if you land on the childbirth square, everyone has to sing the Happy Birthday song.
Childbirth means more expenses every month, as well as other child-related expenses. There is also a charity square. Should you decide to contribute to charity, which is $400, you get to throw two dice for three turns, instead of one.
Of course, the faster you move, the more frequently you receive your income. And every time you throw a six on the dice, you have to draw a card for incidental expenses.
You can end up paying $400 for a flat tyre or spending $20,000 on a leisure boat. Talk about living life in the fast lane.
Throw a one, and you draw a market card. From there, you get to know if a stock is involved in a lawsuit and is now worth only a fraction of your original investment. Or that the apartment you have bought has a buyer in the market at a certain price.
Every once in a while, someone has to go around the room ringing a bell to announce that a recession has hit and property prices have plunged, interest rates have gone up and banks are pulling back loans.
Or that each player has to roll the dice. Those who throw a one or two will get a serious illness. Or they may be retrenched. Sometime rather late into the game, the bell will ring to tell you that your kids, if you have any, have grown up and that you are getting a certain amount of extra cashflow from them.
The aim of the game is to get out of the rat race by securing sufficient passive income to exceed your monthly expenses.
After that, you 'graduate' to the outer circle, where the aim is to amass enough wealth to achieve your ultimate goal. Six of us played the game. In the first few rounds, there were two who kept landing on Opportunity squares.
They got the chance to buy some stocks, and then went on to buy apartments that yielded rental income, adding to their net income. The rest of us could only watch as they reaped the rewards of the opportunities when the market offered to buy what they owned for significantly more than what they had paid.
And worse, some of us had to keep forking out money for the various incidentals like a fine from the police or a birthday party for a kid.
One player, who didn't have much in the way of assets and cash, had to pay $20,000 for a leisure boat. In the first few rounds I was rather frustrated because I did not land on the Opportunity square.
But the consolation is, I was moving pretty fast and collecting some pay cheques. I also didn't have too many incidental expenses.
Two of the cards I drew were child-related, but since I didn't land on a childbirth square - and so did not have any kids - I didn't have to incur the expenses. After the first few rounds, we were told that a person who drew an opportunity card could let others in on the opportunity.
One guy got a chance to buy stock XYZ at $5 - that's the low end of its trading range, we were told. Since I didn't have an opportunity of my own, I decided to ride on his.
But of course, he gained as well. He was willing to allow us to buy only if we paid him $5 for every stock we bought through him. I agreed. So in effect, my cost for the stock was $10 apiece. I invested $1,500, which meant I bought 150 shares. A few rounds later, I got my own opportunity.
And since I didn't have much capital, I opted for a small opportunity. Again, that was an offer to buy a stock - this time, stock ABC. Ting! Ting! Ting! Someone went round the room. Market News.
'XYZ Pharmaceutical has been sued for the side effects of one of its products. It shares have crashed. And the company has consolidated its shares, from 10 to one. The post consolidation share price is $5.'
My $1,500 investment was now worth only $75. But the good thing was, my other stock managed to appreciate significantly. And I made some money from that. Then stock XYZ rebounded to $30, and I recouped some of my losses.
With the gains from stock ABC, plus a bit of loan from the bank, I bought a couple of apartments that had positive cash flow. A few rounds later, I sold them at a big profit. With more capital, I put more into the next stock that came along. I also moved on to a big opportunity and bought an apartment block for cash.
That yielded monthly cashflow of $3,200. The third stock I bought shot up. And because of the bigger initial sum I put in, the profit was sizable. With that profit, I was able to pay off my mortgage. The increased cash flow and reduced expenses meant that my passive income exceeded my expenses.
Voila! I was out of the rat race! Of the six players, only two managed to get out of the rat race. At the end of the game, we were asked to discuss what insights we gleaned. I went back home, thought a bit more about the game - and came up with a few realisations.
In a number of ways, the game reflects the reality of the world we live in.
For one, luck matters. Whether you land on the Opportunity square, or whether you get an illness or get retrenched, or end up having to pay for a lot of incidentals, depends on the roll of the dice. Even with investments, a stock may be cheap. But it could get cheaper - like my stock XYZ.
Second, it pays to have insurance. We were all asked if we wanted to buy insurance, which all of us did. So we all had to increase our monthly expenses by a certain amount. Eventually, those who had an illness managed to claim a sum to defray their medical expenses.
Third, it pays to be charitable. I contributed $400 to charity, and for the next three turns I threw with two dice. That sped up my move round the board and increased my income by some $4,000, I reckoned.
Fourth, it pays to have well-connected friends. Some of your friends may have access to opportunities that you don't. In the board game, I bought my first stock through a friend - the fact that it bombed notwithstanding.
Fifth, it doesn't pay to over-leverage. The market may turn and the banks could pull your loans.
Sixth, not all debts are bad. In the game, a guy made $100,000 from land he bought for $5,000. And the first thing he did was to pay off his mortgage of $85,000, despite the low mortgage interest rate. After that, he missed out on opportunities to buy assets that would have yielded him passive income because he didn't have the money to pay for them. And the bank would only lend him up to a certain multiple of his income. By the time we stopped the game, he was still not out of the rat race.
The new and perhaps more significant realisation I had after playing the game was that one should always take profit. Perhaps this is the one realisation that many, who are seeing their once winning stocks now languishing in the sea of red, wished they had had earlier.
In the game, I first started by buying stocks. Then I cashed out, and geared up slightly to invest in a two-bedroom apartment. When there were profits to be made from the apartment, I sold. And the next big investment was in the apartment block.
So what I did, and which proved successful, was to continuously recycle the capital into the better assets. In real life, too, that has to be the way. When I first started to look for an apartment many years ago I was frustrated because I couldn't afford a lot of the apartments in the market.
My mum's advice to me then was: 'Ke ngau wan ma.' (Cantonese) That means: 'Ride a cow while you look for a horse.' In other words, first lock in something that you can afford, then trade up when your finances allow you. That has proved very wise advice.
Similarly, I guess, in stocks. If you have made money from penny stocks, perhaps it makes sense to eventually trade up to blue chips. Having a portfolio of solid companies you know will still be around 10 or 20 years later beats having a basket of penny stocks that may not survive the next downturn.
Of course, decisions are a lot easier to make in a board game than in real life. In real life, questions like when to take profit, and when not to, are never easy to answer.
The complexity of the world notwithstanding, you should always try to make as best a decision you can, bearing in mind the lessons and principles drawn from a board game.
This article was first published in The Business Times on 5 July 2008.
