Watching TV late at night and learning how to flipping houses, might lead you to think that real business seems a lot like playing Monopoly(tm). After all, the object of Monopoly is to buy as many properties as you can and end the game with the most money. Sounds like a sound formula for early retirement, eh?
In Monopoly, your costs are based on which spaces you land on, and what your opponents own. If you land on property taxes, then pay $75. If you land on an opponent’s property, then pay rent. If the opponent’s property has a hotel on it, then pay a lot of rent. Your costs depend on where your pawn lands, not how much property you own.
In the real world, companies (and house flippers) must pay fixed costs, which usually increase with the amount of property that you own. No matter how much or how little revenue you take in, you have to pay fixed costs. If you don’t, then you lose your property. Therefore, because fixed costs create risk, the more property you own, the higher your risk.
Get it? In Monopoly, your costs are roughly based on your opponents’ assets. In real life, your costs are based on your own assets.
This means that a strategy that would be successful in Monopoly could, in the real world, spell disaster. My Monopoly strategy, which usually works against young children, is to buy as many properties as you can, before your opponents, so that you can hit your opponents up for rent every which way they turn, rather than letting them do that to you. In the real world, this would be a rather stupid thing to do. Every property that you buy will increase your fixed costs, including property taxes and interest, thereby increasing your risk of failure. Furthermore, with all of your assets invested in real estate, a systematic drop in prices and rents would finish you off.
In short, minimize your assets and your fixed costs.
[Image: PayDay by Mark Strozier, on Flickr]