Like many other children of the 80s, the vast majority of my life knowledge comes from video games. Sure our parents thought we were wasting away our lives, mindlessly playing Nintendo all day and night, but we knew better. We knew that all that coin collecting and memorization of cheat codes would be what gives us the skills to carry us through our adult lives. Don't believe me mom? Here's what video games taught me about investing.
Have a Plan
When playing Pac-Man, you can't simply go around chasing after the next dot without giving any thought into what your next move will be. You need to be constantly planning ahead two to three moves as well as have an overall plan of what order you're going to clear the board in. You need to think about things like what's the top score you need to beat? How many guys do you have left? Do you take the risk in going for the cherry or play it safe and stick to the dots. Do you have enough power pellets left incase you get in trouble?
The same is true when investing. It's not enough to simply contribute a little of your check to a 401k each period, you need to have a plan for the big picture. You need to think about things like how much do you need to retire? How much time do you have left to save? What level of risk you're willing to take with your investments? Do you have enough in savings if you get in trouble?
Don't Trust the Hype
It's 1982. We're in the middle of the golden age of video games. Things are really up an expectations are running high for what may be the greatest video game ever made.. E.T.!!! After all, the movie was incredible and here's a game where you get to put yourself in the shoes of the alien and live out his adventures first hand. How could it be anything short of amazing?
It turned out to be quite possibly the worst video game of all time and is widely credited with killing the entire industry for nearly a decade. With the release of a new IPO, the same all hype, no goods situation can exist. This was especially true during the .com boom of the late 90s, such as with Pets.com. They managed to raise $82.5 million in an IPO and spent millions on Super Bowl ads, but ended up filing for bankruptcy just a few months later. It turned out their biggest asset was a sock puppet.
Small Investments Can Really Grow
It doesn't take a large investment of time or money to get started. You just have to take that initial step to get the process going and then you can sit back and watch your investment grow. For example, a typical investment that averages 8% return per year will double in value every 10 years. Much like on Super Mario Brothers, this really starts to add up quickly.
The key with investing as well as with the Super Mario Brothers 1UP trick is once you get it started, leave it alone.
Make a Decision or One Will Be Made for You
Tetris and life both have time limits. If you act quickly and make good decisions, you'll go far. But, if you wait to long, you'll have a decision forced upon you and probably won't be happy with the results.
If you wait more than 60 days to roll over an IRA, you run the risk of paying taxes. If you wait too long to start investing, you're going to have a lot of catching up to do. So do yourself a favor when investing or playing Tetris, decide was needs to be done and then act quickly to do it.
When playing Mega Man you know if you invest in a single character you may get lucky and do really well on one level, but it's a horrible long term strategy. You know the time will come when your one character performs horribly on a certain level and you'll wish you had invested a bit more in your other characters. Each character performs better under certain conditions and you want to have a good mix.
The same is true when investing. You may have chosen to put everything in one bucket and it has worked out ok so far, but the time is coming when that investment is going to be a horrible choice for the current market conditions. Make sure you build up a well rounded portfolio.
Expect the Unexpected
In the early 90s we all thought we had mastered anything the video game industry could throw at us. We all had our systems and strategies that we'd instantly apply to any new game that came out to keep our competitive advantage until we learned the ropes. Then something happened that caught us all by suprise. Games went 3d!
Sure they analysts told us for years this was looming, but they're always predicting stuff like this. Much like the current recession, none of us expected it to actually happen. Major change like this is rare, but when it happens you need to toss out all of your previous systems and strategies, admit that you're a total noob and take it very slowly while learning a whole new way of playing the game.
Savings Add Up, Investments Multiply
When playing the crash mode on Burnout, you try to rack up as many points as possible, but everyone knows the real goal is to get the explosion multipliers. Actually, you really need to focus on both to get the top score
When you save money it adds up over time which is good. But by investing it, it starts to multiply over time. The rate it grows may be only 5-10% a year, but as mentioned before, at 8% your money doubles every 10 years. Over time this results in your money growing at a much faster rate than by saving along.
Timing is Everything
Not all video game lessons are learned during childhood. They continue to teach many of us throughout our entire lives. Just last year a lot of us learned a valuable lesson about timing, both on Guitar Hero and with the economy.
The old saying "Buy low, sell high" comes to mind here. In 2008 the stock market took a significant dive do to the sub-prime mortgage problem. But shortly after, even solid stocks that had no significant tie to the finance industry also lost value. The reason? People paniced and started cashing out their investments. This is really is the worst action you could take. The damage is already done and odds are, once the market is already down significantly it's likely to go up in the future than drop much further. That is the best time to buy.
Don't Make a Fool Out of Yourself
Just because you see someone else who does something amazing and makes it look easy, doesn't mean you'll be able to do it too. You may read about others who made it rich playing the stock market, but odds are they have years of practice and a fair amount of luck that you don't.
The first time you try investing on your own or playing Dance Dance Revolution you're most likely going to wind up falling on your butt. Save yourself the pain and either hire someone else to do it for you, or practice where it doesn't really matter. With DDR that would be in the privacy of your own home, with stock trading simulators would be a good choice.
It turns out all that time spent playing video games wasn't such a waste after all. In addition to providing countless hours of relatively cheap entertainment, they tought many important life lessons. I'm looking forward to see what I'll learn from next years games.