Speconomics: It’s Your Money

Written by Joe Spanier on . Posted in Finance, Magic Culture

Right now, you should go buy:

Innistrad Dual Lands

Every good card in AVR

Some Legacy staples

Some cards that may get unbanned in some format some day (Let’s go with … Bitterblossom in Modern and Balance in Legacy, why not? But, since we don’t want to miss anything, don’t forget some Jace, the Mind Sculptors, Ancestral Visions and Mind Twists)

And just because I can … go buy some Havengul Liches. They could be good some day, who knows?

Also, go buy Huntmasters, they’re good cards and may get better postrotation.

Oh yea, don’t forget to buy Power because it’s Power and Power is always a reasonable buy.

Hopefully, some warning sirens just went off in your head. They should have. I just gave you a list of cards that you may or may want to buy at some point that may or may not make money for you some day and may or may not be reasonable suggestions. Some of those are better options than others, some are riskier than others, and some of them are just random. So what? Buy them all.

When it’s put in list form like that, it’s pretty obvious that not everything I just mentioned is worth jumping out of your seat to go buy. Or, even if you liked all of the ideas, it may be the case that you CAN’T follow through on all of them. Why? You, like everyone else, don’t have unlimited money to work with. (Frankly, if you do, you should stop reading my articles and just give me some of that unlimited money. I won’t complain.)

Why do I bring this up? A lot of financial writers do this exact thing all the time. Sometimes it’s intentional, sometimes it isn’t.  You may be wondering why, if this same type of list-creation happens all the time, you don’t have the same warning bells going off constantly. Because they don’t give it to you in quite as list-like a format. Instead, they give it to you as a weekly article. This week, they’re talking about rotation, so you should buy cards for that. Next week, they’re writing about Griselbrand in Legacy, so you should obviously be buying Legacy cards. You’re supposed to be buying whatever they choose to write about.

Here’s a trick:

It’s easy to make up reasons why cards are a buy at any point. That doesn’t mean it’s right.

What if, instead, there was a better way to think about where to put your money? Could we make decisions on more than what a writer feels like talking about? Let’s imagine that hypothetical world.

*NOTE: That list of things to buy at the beginning was made as an example. I’m not actually advocating that you should go out and buy them all.

So I Hear You Have Money …

I have no clue how much. And I don’t need to know. If you want to take advice here or there, then the first step is figuring out what you’re working with. That number is different for different people. How much money you have lays the foundation for how discriminating you need to be. If you have $20 to work with, that leads to different decision calculus than having $20,000 (in addition to the obvious $19,980 difference).

So how much money do you have? Well, more specifically … how much money do you have for speculating?

Your answer doesn’t have to be as much as you can put together. Maybe you’re new to the whole concept, so you’re only comfortable locking up a small amount of money. Maybe it’s half of the money you got as a birthday present, whatever that number may be. Maybe it’s all of your birthday present. That’s up to you.

You need to know how much you’re willing to risk. In actuality though, there are two important numbers:

  1. How much money am I comfortable tying up in speculation at any one point?
  2. How much money can I dig into if I want to make a big move (as a response to a hype spec)?

Think of the first number as your working capital. This is how much you can use to buy the “weekly thought” or the “preparation for the next season.” Understand though that when this number hits zero, you’re tied up. You don’t have more money. (If you actually have more money that you want to add, you should reassess this number before you tie yourself up.) For instance, maybe you keep 500 tickets on your MTGO account and you use this to stock up for the next Standard season. That’s your working capital.

The second number is more like a loan to yourself. If the world is about to go crazy for Land Tax, it might be worth it to dip into some cash you had set aside for the sake of the hype spec. Since this isn’t part of the money you comfortably plan on keeping in MTG Speculation, you should have a rather strict deadline for when you pay yourself back by. By doing so, you’re forced to address the consequences of your decision.

It’s quite easy to buy a bunch of Mind Twists and leave them in a shoebox for five years. In that case, you only address it when it becomes a “good spec.” Otherwise you get to forget about it in the bottom of your closet. That may be good at making you feel good if it pays off, but it’s not an efficient use of capital. If you do that continuously, you’ll end up locking up a lot more money than your success will make up for. It’s not a winning proposition.

Kiss Your Money Goodbye

You don’t actually have to kiss it goodbye, but you should be prepared to lose it. The fact is that the MTG Market is larger than any of us, and we’re all bound to make mistakes. You should never speculate any amount of money that you can’t afford to lose. If losing money is your concern, then you shouldn’t speculate.

If you’re willing to lose “some” money, but your risk tolerance is pretty low, the go-to is Legacy staples. This is a trap. While they may retain some value over a substantial period of time, bad things can happen. For instance, if you had decided to buy into Legacy (not knowing much about Legacy other than that “card values rise over time”) and that decision happened to coincide with the Legacy bubble, you would have gotten burned on $90 Force of Wills. If tomorrow, StarCity announces the end to their Legacy Open series (perhaps they reach a backroom deal with WotC to switch to Modern instead), you will get burned. Housing prices will keep going up. Legacy staples will keep going up. EDH foils will keep going up. This time is different … except that it never is.

(I’m not calling for a crash of Legacy prices tomorrow or anything of the sort, I’m just stating that things are not as certain as they may first appear.)

Because of the uncertain nature of Magic, you should never speculate with money you need. Even if it’s money that you just need to pay this month’s rent and can “spare” it temporarily, you don’t want to tie up capital that, if things go awry, will cause serious problems. By needing the money at some point in the not-too-distant future, you risk having to sell out of positions before you want to.

For instance, if you were to buy into new-Standard cards figuring you can sell on Oct. 1, you may be wrong. It might take until a month or more into the format before your investments pay off. While you want to set deadlines, you want your deadlines to be out of purpose instead of out of necessity.

On the flip side, you shouldn’t get unattached to your money. It’s incredibly easy to leave a pile of cards sitting there that you speculated on six months ago, but they never went anywhere. You have a bunch of cards that you’re never getting rid of. From that perspective, you may have been just as well off by burning your money. No longer paying attention to specs, even temporarily, is a good way to watch values plummet further and lose even more money. This is especially true of misses, where a card fails to break out. Slowly but surely, supply outstrips demand, and price continues to trickle down. You can lose more money by waiting.

If this leads you to one more realization, it’s that the shoebox investment should not be a desirable situation for any active speculator.  If your goal is to speculate, then there is no argument for speculate over the longer term than the shorter term. For instance, if you have $20 to drop, why would you choose to speculate on a card possibly getting unbanned in a few years? Your alternative would be something more likely and sooner, such as Standard rotation or a Modern PTQ season. Speculating on random possibilities far into the future is likely both less certain and less profitable than shorter-sighted investments.

EXCEPTION: I’m very much a fan of getting “shoebox sleepers” in trades when I’m trading things that are otherwise difficult to move. (Throw-ins also work). I would not go out of my way to pick up possible sleepers if it involves giving up cards that are liquid enough to be part of my working capital.

At its core, Magic is a game. Magic is a potentially-fragile market. No matter how badly you may want to let those EDH foils sit in a closet, the inherent risks of “Magic is a game” will always loom. Don’t take it too lightly for “long-term” specs.

More importantly, whether the cards stabilize or not, the issue is that it’s tied up capital that you’re not paying attention to. If you’re an active speculator, you can do a lot more with free capital than have it in cards that sit there oscillating randomly. If you’re not actively keeping a pulse on your speculation targets, then you’re not doing your job.

Being an active manager doesn’t mean you need to compulsively check prices every 30 minutes, but it does mean that at any point you should know how things are going within a reasonably relevant timeframe. If you’re speculating on Modern PTQs in six months, you probably don’t need to know more than one to two weeks’ accuracy. If you’re speculating on Pro Tour results, then the 30-minute update might be necessary.

“But I Can Afford It”

Let me clear up this misconception — the fact that it doesn’t cost you much is NOT a reason to buy something. Imagine a situation where you spend $20 every few weeks when a writer tells you to buy something. Think about how much money could be going into your investment fund after six months or a year. Imagine that $20 you spent on potentially-unbannable Legacy stables was instead spent buying Wolfir Silverhearts at the next Pro Tour.

Another example: I bought Hero of Bladeholds on MTGO for about eight tickets each when LSV won the WMCQ with three in his sideboard. I sold them for nine tickets each within 48 hours (some got sold for more than that). While that may not seem like much, we’re talking about buying two more Heroes — with a 12.5% profit in two days. That’s a pretty good return by a lot of metrics. I’d rather be able to buy two more Heroes every time that happens than count on some cards in a shoebox having a breakout five years from now.

A lot of people get caught up in the “playset restriction.”  The reason people don’t see a problem freezing up $10 here or $20 there is because they always have enough to buy a playset of something they want to speculate on anyway. This is a unnecessary psychological barrier.

When you buy cards for speculating, you’re not limited to four. You don’t even have to go in batches of four. Maybe spending $120 on eight Bonfire of the Damneds at $15 each was more than you were comfortable with. Maybe $60 was less than you were willing to do. Why not $75? $90? You can find your own comfort levels. It doesn’t need to go in increments of playsets. There’s a wide range between $60 and $120. Take advantage of it. That’s how you scale up making a few dollars here and there with each spec.

Did You Kiss That Money Goodbye?

I’ll certainly go into more depth about this at some point in the future (maybe my next article), but you need to have some sort of risk tolerance. How much money are you comfortable losing? People like to ask “What do you think I should buy?” This question assumes that you and I have the same goals with our speculations.

It should come as no surprise that there is a lot more money to be lost in low-end rares/mythics. Since it’s possible to scale up quantity almost limitlessly,* we can always just buy more low-end cards to equal the value of higher-end cards. Thus, if we want to invest 50 tickets, we’re not limited to only five-plus ticket cards. We could either buy 5 copies of a 10-ticket card or 50 copies of a 1-ticket card, it makes no difference.

*For our purposes, this is true. This breaks down once you start talking about a few hundred copies of a card, but I’m assuming that you’re not speculating THAT heavily on any one card yet. I can talk about “giant specs” if there’s interest. I imagine that would apply to a very small number of people though.

As a rule, cheaper cards are riskier as a percentage of your investment. It is pretty easy to lose 50 percent of your investment buying bulk rares at .02 that you can only sell back for .01 if they never go anywhere. Conversely, Geist of Saint Traft at 22, even if it gets partially replaced by Blade Splicer, isn’t going to have its price cut in half. Obviously, these examples are extreme, but they firmly illustrate the point.

Not surprisingly, this goes the other way. Even if a very good card (Geist of Saint Traft) takes over the format, it may move from 22 to 28, for a 27 percent gain. Compare this to Falkenrath Aristocrat, which went from four tickets to 11, for a whopping 175 percent gain.

How much risk you want to take on should be based on what do I want out of this money? If you want something volatile, look toward cheaper mythics and low-end-but-still-worth-something rares. If you just want to try making a few dollars here and there, look for when valuable cards are poised to break out and become better in the metagame.

I’ll go into more detail about how to determine risk/reward payoffs, but that’s too much to squeeze into this article.

What else could I do?

Now that I’ve talked about setting limits/ideas/plans for your capital … we reach the most important part — working within those constraints. It is possible that buying 1,000 Exquisite Bonds will pay off in five or 10 years? Is that the most efficient use of our capital? What are our alternatives? How does buying Exquisite Bonds compare to buying up for rotation? Unfortunately, it’s not just this rotation that our Exquisite Bonds would tie us up for. So how about when we compare it to Standard rotation (which can exist in October/November) AND Modern PTQ season?

When establishing “what else could I do,” it’s important to have some understanding of how long that capital would be tied up. What are you missing? What about all those hype specs when Wolfir Silverheart breaks out of a Pro Tour? Sometimes, that 100 percent gainer over two years isn’t as attractive as hitting 50 percent gains at each Pro Tour over that two-year period.

I’m going to interrupt myself for a second, as my inner voice is once again making a suggestion. “Lazyyyyyyyyyyyyyyyyyyyyy.” Surprisingly, its suggestion to be lazy is a legitimate option. In the aforementioned Exquisite Bond comparison, one of them requires effort at each Pro Tour. One of them does not. I’m assuming that since you’re reading this article, you’re willing to put in some effort. Speculation is not for the lazy. If you’re making a choice because it requires less work, that’s your choice, but it’s not an optimal one from a speculation perspective.

Nobody Else Cares About Your Money

This last section is going to be a bit of a critique of Magic Finance articles and what some people seem to want out of them. Financial writers get off very easy by making the types of list I gave at the beginning of the article. They’re easy. They’re “hot.” More importantly, there’s no accountability. If a writer suggests you buy a card for five years from now, nobody’s going to hold it against that writer when, five years from now, that speculation failed.

Another issue worth noting is the ability of people to avoid facing their losses in MTG speculating. I strongly advocate setting deadlines for yourself and forcing yourself to clear things out so you don’t become complacent. If you buy a significant number of cards that could become unbanned in Legacy one day, you’re only hitting that shoebox when one of the cards becomes unbanned. In that case, you’ll be thankful you have the cards. The loss has become so distanced from the gain that you’ll be happy with your decision, even if it was, in hindsight, a value-destroying one.

Likewise, if you drop $50 each into three different rares, then sell out of one of those rares for $100, you’ll feel like it was a success. The $50 each that was lost on the other two rares will be a distant memory, and they’ll sit around collecting dust.

Because of this tendency and because writers don’t face any real accountability, writers are incentivized to make more suggestions, even if they’re poor ones. Don’t get me wrong, advice is not always perfect and should not be expected to be perfect. If they were always right, the writers giving the advice would be a lot wealthier and not writing about it.

More important than all of this, even if the writers are making fine suggestions, that doesn’t matter. We’re looking for good suggestions. Writers get to operate in a world where capital restrictions are nonexistent. That’s not how reality works and that’s not how your wallet does either. (If it does, PLEASE let me know how. I would love to know the secret.)

Writers don’t tell you when to sell things they tell you to buy. There’s no real follow-up. They don’t need to set timeframes. They don’t need to follow through. Their money isn’t at stake. Yours is. All of the concerns with speculating aren’t their problems. They’re yours. The writers just get to make the calls. You get to deal with the details. No sane person should think buying up cards for potential Legacy unbans is a wise choice right now. If you had unlimited cash, it’s probably true that it’s more likely to appreciate in value. That’s not your situation though. You have to make choices. Speculating is about choices. Always keep that in mind, especially if you’re reading suggestions that think otherwise.

Until next time, we’ll keep talking about risk/payoffs, but with more numbers and how to compare them. That was originally going to be this article, but this seemed like a necessary lead-in.

~Joe Spanier~
@FoundOmega on Twitter

 

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