Introduction

Before you lies an investment opportunity in one of the best areas of the world. Your challenge is to nurture a new business worthy of the finest entrepreneurs in that line of business and meeting the rigorous standards of venture capitalists.

Assume you have accumulate savings from your paychecks, inherited a windfall, or married into wealth. You'll start out with enough money to begin invest in one property and operate for five years. The game will last for thirty years.

There are several strategies to this opportunity with, but two in particular are worthy of mention. One strategy is similar to the approach of long-term intrinsic value investors who adhere consistently to a growth regimen based on safe sound prudent principles. The other strategy is similar to the approach of short-term day traders who consider each new decision like a new wager at a gambling casino.

Each decision made and its consequences enable learning by experience. Venture performance will be impacted by specific factors that seemingly vary at random and result in fluctuations in productivity and profitability. Similarly, the market prices and values of individual common stocks are impacted by diverse factors that fluctuate unpredictably and uncontrollably. The venture challenge provides a feel for risk, uncertainty and the imprecision of forward-looking valuations.

You will be ranked at the end of 30 years when you retire. Let the games begin.

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Rank and Returns

The qualitative rank of the entrepreneur at retirement can be supplemented with an estimate of the growth of net worth, a quantitative measure of success in achieving the goal of building wealth for consumption, gift or bequeath.

Assume each property (fixed capital assets) can be liquidated for a price that will net a value after capital gain taxes and transactions costs equal to the constant purchasing power of the original cost basis in each property. This liquidation value is one factor in estimation of the intrinsic value of the properties. Also assume cash balances (working capital assets) will earn interest income net of taxes at a rate that will exactly equal the rate of price-level inflation during the thirty years of the venture. Last, assume distributions of accumulated earnings retained as cash balances will be taxed the effective income tax rate of 20% on average. Thus, the growth in real (inflation-adjusted) net worth is equal to the ending cash balances minus beginning cash balances, less income taxes:

Growth = (Ending Cash - Begin Cash) x 80%

The annual average growth is:

Annual Growth = Growth / 30

The annual average return can be calculated for the individual properties or for the portfolio of properties in the venture. A rough approximation for the venture is the total returns divided by 30 years and divided by the average property acquisition cost:

Return = (Total Cash Received / 30 years) / (Average Property Cost)

To have the necessary data for these calculations, have pencil and paper at hand to record the results of each decision cycle of the game.


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