Sunday, 20th January 2013 - 0 Comments
A good many hours of my youth were spent playing real-time strategy (RTS) video games on my PC. Later on in life I often considered whether this was "wasted" time. I came to the conclusion that life was too short to be concerned about vaguely defined opportunity costs. In addition I came to realise how much these games are able to teach about resource management, cash flow and the nature of investing. Hence I was gaining an education in financial prudence, albeit while destroying an opponent on a virtual battlefield.
A critical aspect of nearly every RTS is resource management. There is often a finite supply of some highly-prized resource scattered throughout the terrain, which needs to be collected and refined to generate cash. This cash is subsequently utilised to train infantry, construct new buildings or deploy armoured vehicles, which can used to obliterate the enemy.
Early variants of these games incorporated a finite-resource-harvesting model. Famous examples are early games within the Command & Conquer franchise. This scenario involved a limited quantity of resource being scattered throughout the map. Harvesting units would patrol the areas and reduce the available quantity after transport and refinement. This encouraged aggressive expansion, as control of resources was generally the key to victory against one's opponent. Later variants allowed the resource to re-grow, albeit it a significantly reduced rate compared to the harvesting (which itself could be increased by deploying multiple harvester vehicles).
More sophisticated RTS games, an example of which is Total Annihilation, introduced the infinite-supply-rated-extraction model. Unit construction and subsequent power was not measured in absolute quantities of metal or energy, but rather in terms of resource consumed per unit time. The resource supply sites scattered throughout the terrain also provided a rate of extraction per unit time. Hence the goal was to make sure that the rates of extraction were always exceeding the rate of consumption.
More recent games introduce a hybrid of the two models where there is an initial fixed supply of a prized resource within the battlefield, but certain buildings or units can be constructed, which produce a recurring cash flow. The units and buildings varied in their tactical capabilities, as well as their yield. However, fundamentally they provided the commander of a team with a set of assets.
Often the commander of such an army is presented with the choice of how to deploy the capital received from harvesting finite resources. The choice comes down to short-term production of new units or investment in cash generating assets, which provide a hedge against dwindling resources on the battlefield. More often than not the average commander will choose the short-term benefit of additional units over the, admittedly expensive, cash-generating assets. Usually, this is the wrong strategy.
The more sophisticated approach is to invest a large fraction of the initial cash flow into construction of the cash-generating assets. In C&C: Generals, one of the aforementioned Command & Conquer games, this involves the construction of supply pads, hackers or black markets depending upon the choice of army. The real sophistication of this strategy becomes evident when the initial cash flow from these assets is further deployed into producing more cash generating assets.
The mathematically inclined among you will recognise this as a geometric, non-linear process, dependent upon time. These processes are characterised by slow initial growth but rapid expansion after extended periods of time. Thus, there soon comes a point where the cash-generating assets (such as the supply pads, hackers or black markets) are providing significant cash flows to fund huge expansion in unit construction, leading to easy victories.
It is straightforward to see how this scenario is analogous to the "real world" practice of investing. Consumers are often faced with the decision to deploy their initial resources (i.e. their cash!) towards a short term gratification, such as a daily coffee or expensive watch. In essence they are foregoing the ability to purchase cash-generating assets, such as a common stock which provides regular dividend payments.
Had these consumers instead put their money towards continual purchase of common stocks and re-invested the dividends into more common stock, then over a period of time cash would be generated automatically. This could ultimately be used to fund luxury items of the type previously described - without materially affecting the rate of new cash being provided.
One can also compare the finite nature of RTS battlefield supplies to a finite resource such as the amount of money earned as a salary. With finite resources on the battlefield, only a finite number of units could be ultimately produced. Analogously, with a lifetime salary earning, only a fixed number of luxury items could be purchased. By choosing to invest a fraction of this salary into cash-generating assets, with the aforementioned non-linear compounding, it would be possibly to purchase a far larger quantity of items - i.e. leverage a significantly larger amount of utility.
So, not only was I enjoying the thrill of military tactics, resource management and virtual destruction of my peers, I was setting myself up for a sound, long-term, investor mindset.