Monopoly Theory
Before analyzing how to invest in stocks I want to discuss about why investing in stocks.
One of the main reasons for investing is to achieve profitability, because that, i will try to show with my theory why companies (or shares if we own a part of them) have long-term higher returns than any other assets. Because, I have used the Monopoly game to discuss with my friends about this theory, I called at this the Monopoly theory.
Monopoly Theory:
"In a society the only asset that generates new value are the company’s (or shares if we own a part of them). The others assets are used only to transfer goods from one person to another.
A long-term returns generated by the rest of assets can not be greater than the generated by the company’s. "With this theory I hope to show why stocks produce the greatest long-term profitability.
I will try to show this for different ways and try to explain with this theory different economic events. Each week I will publish a demonstration or explanation. I hope you are interested and leave your opinion.
Upcoming publish demonstrations:
- Resemblance to the Monopoly game (released)
- Similarity to the pyramid of predation
- Profitability compared to other goods.
- Numerical simulation.
Upcoming publish explanations:
- Economic Growth 1700 - 2010
- 2009 economic crisis.
- Socialism or capitalism.
- ….. ... ..
Resemblance to the Monopoly game - demonstration by the absurd
Using the resemblance with the Monopoly game we can test this theory using the absurd. This means that we assume that any of the other assets have higher returns to companies (or stocks) and following this course we will see how we arrive at a not viable situation, so we can ensure that the starting condition is not true and therefore the returns of other assets can not be greater than the generated for companies.
The game
Monopoly is a game where the goal is to accumulate assets to let the other players into bankruptcy (no assets and debts)
The players throw two dice and move as many blocks equal to the sum of the dice. If the box where they arrive is not the property of another player, he can buy this box, if this box is owned by another player he have to pay a rent for falling into it.
Players move through the boxes and every time they pass through the first box again, they add a fixed amount of money to their account. Then they can use this money to buying boxes or paying rent.
So here we see that:
- The players earn money every time they pass through the first box. The sum of the players earn as they pass through the first box is what the company produces or what is the same as what the society produce. Each time a player goes through the first box creates value for society because the sum of all cash and property of all players is increased by a fixed amount added to go through the first box.
- When a player arrive to a box owned for other player, the first player must pay rent, in this case this assets (the box) does not produce anything, just makes that money pass from the player who fell in the box to the owner of the box (to rent .) This does not produce anything for the society because the company did not change the amount of money and property there are.
Step 1)
At the beginning the game is set in a peaceful manner. All players go round each at a different speed depending on luck to have to roll the dice and buy more or less boxes depending too the same lucky.
It is easy to see how the players pay less than they receive by going through the first box and this situation could continue indefinitely in time.
Step 2)
Gradually, the game becomes complicated. The boxes are increasingly owned by the players and whenever there is a player or more that own several similar boxes, he can begin to build houses. After building homes, the players that fall on the box with houses have to pay a higher rent.
So there comes a time that the rents that all players pay is greater than the amout that they make passing through the first box (what players earn in a whole to spend again for the first box.)
At this time there are players who have less and less money and must begin to mortgage their boxes (players who have no homes or those with less) and there are players who have more and more money and can buy more houses to increase his rents.
Step 3)
There comes a time that players that have less houses are falling into bankruptcy, while others takes the possession of all property and money.
Conclusion 1):
In step 1, all players increase their assets, because they are paying in rent less than what society generates. In this moment there are no assets that make more money than what the company generates, so any player accumulates money.
In Stage 2, and 3 the players are paying for rent more than what society generates, this is a state that can not last long term, is not sustainable, because as we saw a only player gets all the money leaving the remaining assets in bankruptcy.
This situation is not valid, therefore we can say that the absurd show that nothing can produce more than a company or part of it (stocks)
Conclusion 2)
If the players could continue on an ongoing basis as in stage 1, would come a moment that the player who won the game would have more money than he make leaving bankruptcy to the other players.
Discuss this later, but for now we can conclude that a stable situationis always is more profitable for all players.
