Hello, I am Nicolas Bustamante, and each week, I write about concepts and methods to build successful businesses.

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I have recently been on a roll about understanding value investing. I have been reading every book by Graham and Dodd, Warren Buffet, Charlie Munger, Seth Klarman, Howard Marks, and other value investors. I believe it is the missing piece in my understanding of business. While reading, I have been thinking about applying this knowledge to the company I am building. It’s hard to practice because value investing is largely about holding contrarian views on intrinsic value for the long term. This means that you need several years before you will know if you have made the right decision. However, while playing with my niece and nephew, I discovered a way to practice value investing: playing Monopoly.

A game of Monopoly lasts several hours, which is, in the world of board games, the most comparable to a real-life business career. As in business, most players are speculators. As soon as the game begins, they start buying every property they can regardless of the intrinsic value. Speculators are invested all the time, having no cash position and, overall, no margin of safety. They don’t think about the present value of their portfolio but speculate that, in the future, they will be able to buy more properties or hit the free parking spot to cash in on some good money. As in real life, when hard times come, speculators are forced to sell their properties whatever the price. As Warren Buffet says: “Only when the tide goes out to do you discover who's been swimming naked.” This offers great opportunities for value investing.

Value investors only buy strategic properties at their fair price, thus rarely participating in auctions where prices exceed the intrinsic value. They patiently build up their portfolio, focusing on the cash flows' current value while building a strong cash position. Having cash is important if you need to pay rent to another player or buy assets from force sellers. A cash position reduces immediate returns, but it’s the surest way to survive unpredictable events. While speculators want to move and do things, value investors want to sit and do nothing. Actually, the best position for value investors in the game is the jail. Here you have no risk of paying rent to your competitors while you receive your various cash flows.

Finally, what is interesting with Monopoly, is the role of luck. Like in real life, speculators can last a lot longer than expected, thanks to luck. Speculators can even beat value investors. Such situations result from randomness, not skills. Speculators are fooled by randomness. If the game is played 100 times, this will be evident. Like in business, only time can determine who is really a good player!

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