Speconomics: What is speculating?

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

In our last episode, our heroes we started by setting the scenery of our speculating.  With that out of the way, we need to start talking about the journey to toss the Ring into the fires of Mount Doom . So, without further ado, let’s begin our awesome but incredibly straightforward and episodic cartoon whereby the Autobots invariably defeat the Decepticons. If you haven’t yet read Part 1, I advise doing so.

What are we doing?  What are we not doing?

We’re speculating.  We’re buying cards.  Then we’re selling them for more.  That was simple.  Thanks for reading, see you next week!

You wanted more than that?  Why didn’t you say so?

First, let’s define the term.  What is speculating?  It is acquiring cards in the present  with the intention of selling them at a higher price in the future.  Speculating includes both trading and buying. But, since I’m talking about Magic Online, trading doesn’t “really” exist.  In other words, it’s buying/trading for value.  Wait, what?!  That’s not right.

Speculation is distinct from value trading because speculation is done on an expected change in value by the Magic market, whereas value trading is about capturing the value differential between traders.  More technically, speculation is about profiting off the future changes in the price of cards as determined by the Magic market as a whole, while value trading is about profiting off the discrepancies of traders at pricing their own cards.

Value trading and speculating do not need to be mutually exclusive.  It is entirely possible to make a trade whereby you are still “grinding value” by current prices, but you’re trading for cards on which you are speculating.  This does mean that accomplished value trader is not inherently qualified as a guru of speculation, nor is a brilliant speculator guaranteed to be a master of the trade tables.  It is also entirely possible that a value trader is a good speculator.  In that case, take their advice as an intelligent speculator–not as a wizard of a related but distinctly different craft.

More important than any list of credentials is the logical support given for any opinion. If the logic used in defense of an argument is not enough to convince you of its merit independent of its author, do not act on it. Don’t take this as an excuse to ignore financial writing, but as a reason to be critical. Instead, focus on the what and the why instead of the whoWho says something should be irrelevant.

Understand your Preferences

If there’s only one sentence worth remembering from this article, let it be this:

Speculating is not about what you think is good.

A couple questions should immediately spring to mind:

  1. Why not?
  2. Then what is it about?

Why not?

Ask yourself this question: do you trust your own abilities as a Magic player to identify what will be “good” in comparison to the rest of the world?

If you can honestly say yes to that question, you’re either one of the five best deck builders in the world or you’re incredibly conceited.  I’m going to assume that you’re not one of the best deck builders alive.

We all have cards that we fawn over. When Mirrodin Besieged came out, I may have had an unhealthy obsession with Massacre Wurm. I was buying every Wurm at I could find at 2 tickets because the card was good. Just look at what it does. Oh, wait. That didn’t matter? Why not?

 

Was it as simple as “I picked a bad card to fall in love with?”  Yes.  But that’s because I was essentially shooting in the dark.  I was making myself play a game that didn’t need to be played. It was a game that I wasn’t inherently good at.

The Massacre Wurm incident also teaches us another lesson: the importance of context.  Cards do not exist in a vacuum.  A lot of very good Magic players and writers talk about the context for deck choices or individual cards and how they fit into the current format.  As speculators, we want to do the reverse.  We want to imagine hypothetical formats where cards with unique or abstractly powerful effects become good, then watch the metagame evolve to meet some (and probably not all) of our preset contexts.

If your immediate response is “that’s impossible!” then you’ve hit the nail on the head.  It is indeed impossible to evaluate cards devoid of opinions as a player.  It’s impossible to create hypothetical metagames without a competitive understanding of Magic.  Being able to determine what makes a card “abstractly powerful” requires a working understanding of Magic.  How we evaluate any cards in any context will require some understanding of the game.  This brings us to question two:

What is speculating about?

I just told you that it’s about something impossible.  With that said, what speculating IS about is making our personal opinions as a player as irrelevant as possible to our financial considerations.  Speculating is about trying to determine relative measures.  Instead of asking is it good, ask is it underplayed relative to its abstract power level?  Ask if it has a place in a potential metagame different from the one that currently exists.

This does not require you to be an excellent player.  It is not your job to figure where a card does fit.  It’s your job to figure out where it could fit.  Let the pros figure out where it does fit and where it will fit in the future.

Buying underplayed cards isn’t the only way to speculate.  Since speculating is about figuring out which cards’ prices are going to change in the future, there are other ways to identify mispriced cards. Mispricing is usually only obvious in hindsight with the knowledge of what a future price will be.  This isn’t always the case, though.  A good example of mispricing would be when there is a significant price disparity between paper and digital copies of the same card.

Take an example from last year at rotation: Phantasmal Image was a $10 card in paper while being under 3 tickets online.  This could be attributed to possibilities such as:

  1. M12 was being drafted constantly and Mythic Rares are the limiting factor on redemption.  This left a relative flood of Rares on Magic Online.
  2. It was a casual favorite.

But that wasn’t the case.  At this point, Phantasmal Image’s competitive implications were at least guessed (Solar Flare, specifically since Illusions had not yet been invented).  M12 Release Events had been done for a month or two. So why hadn’t their prices come closer together?

If you’re waiting for a brilliant explanation, then you’re about to be disappointed.  Truth is, there was no explanation–at least that I’ve ever come up with.  If I had been able to come up with a good reason for such a significant price discrepancy, I would not have bought up a significant number.  Instead, because all of my deliberations produced no reasonable explanations, I bought.  It paid off.  The Magic market is far from perfect.  Sometimes, things don’t make sense.  Sometimes, those nonsense situations produce the best buying opportunities.

NOTE: this only applies to currently redeemable sets.  Once redemptions end, they become independent markets for entirely distinct products even though they may be influenced by identical causes.  Once there is no direct way to move from one to the other, the correlation that they exhibit because of external factors such as tournament results is just correlation and not causation.

Why are we buying THESE cards?  Why are we selling THOSE cards?

The one and only straightforward answer is: we believe we can make money based off an understanding of how the market will move in the future. Naturally it begs another question: why do we believe we can make money in the future?  This also brings questions of how long in the future.  More importantly, we can break the why into two basic reasons which provide important categories for future speculation:

Type 1: Fundamental Speculation

Type 2: Hype Speculation

I use the terms Type 1 and Type 2 intentionally since Fundamental Speculation, like Type 1 is less time-dependent and is closer to an eternal or timeless speculation.  Similarly, Type 2 is about “this week’s hot tech.”

Please let me get away with calling Vintage and Standard by Type 1 and Type 2 just for this comparison. Thanks.

Fundamental Speculation

By fundamental speculation, I mean things that are fundamental to the card.  These are things that make the card an appealing entity in and of itself.  We can choose to make fundamental speculations based on things such as:

  1. Power level of a card. This would entail calculations such as Thrun in Zendikar/Scars Standard, Consecrated Sphinx when it first came out, or Titans when they were getting no love around rotation last year.  For a more recent example, look no further than Geist of Saint Traft.  These are the most obvious in hindsight because it has always been apparent that the cards were powerful and it was just a matter of finding them a home.
  2. Uniqueness of ability. This encompasses cards that do something unique that is begging to be broken.  This category includes both a lot of hits and a lot of misses because sometimes the unique cards get broken and sometimes they don’t.  Cards that would fall into this category: Necrotic Ooze, Misthollow Griffin, Splinter Twin, Stoneforge Mystic and Birthing Pod.  If these cards ever do become good, they tend to shoot up exponentially.  Because of their unique abilities, becoming good is often synonymous with becoming very good.  As a downside, there are a lot of unique abilities that end up irrelevant.  Failed speculations like Druidic Satchel, for example.

The backdrop also becomes an important part of fundamental speculation because the backdrop addresses obvious and predictable patterns of change for future demand.  Check out my last article for more on backdrops.

Fundamental speculation is, at its core, about preparation.  Because you choose what you’re targeting, it should be highly calculated.  You are able to plan your entry points, exit points and maximum acceptable loss.  Similarly, you can choose things that appeal to your timeline.  For instance, Legacy is a dead format on Magic Online.  It’s likely that Legacy will eventually make a return.  At that point, Legacy cards will probably make at least some comeback.  When will that happen?  I have no clue.  You probably don’t either. If you do, let me know.  With infinite capital, it’s worth considering.  But the potential for unknown profit with an unknown timeframe is not the most appealing of options available.   Similarly, if your goal is to make money to pay for a gift for a significant other in two months, speculating on rotation isn’t an option.

This is not to say that fundamental speculation has no downsides.  Anything can happen.  For instance, would you want to be holding Shocklands for the next Modern PTQ season right now?  I hope the answer is no.  Reprints are a constant threat (especially for Modern).  The format can get broken in a different way than you expected, making your speculations bad cards.  A new set can come out before your card shows its potential, introducing something that overshadows it.

Because there’s no specific time frame, sometimes you hold onto things well past their “expiration date” because you still hold out hope that they will do well.  This can lead to tying up capital for extended periods in losing and stagnant speculations.  We’ll talk about how to address losing specs in future articles.

Hype Speculation

Hype speculation is just what it sounds like–making money off of hype.  Is the hype justified?  Who cares?  That’s not a question you should be asking.  It doesn’t matter.   Hype-driven speculation is a reaction to an event–often a Grand Prix or a Pro Tour.  People will buy these cards.  Should they?  It doesn’t matter.  They will.  As such, hype-driven speculation is both comparatively certain and quite profitable.  Some examples:

  • When Patrick Chapin was revealed to be running Olivia Voldaren in Standard at Worlds last year in his Round 1 Feature Match, I immediately bought all of them that I could find at 3 tickets or less.  12 hours later, I had sold out of all of them at 9 tickets each.
  • During Grand Prix Minneapolis, I bought up every Bonfire of the Damned that I could find at 17 tickets or less.  24 hours later, I was sold out after moving my price up to 23 tickets.  Bonfire has since come down from there, though it was even higher as a result of Prerelease quantity drying up.

If you haven’t guessed yet, hype speculation is a reaction to news.  Whereas fundamental spec is planned out, you never get to pick the cards you hype-spec on.  You don’t get to pick your timeframe.  You don’t get to pick much of anything.  The only thing you get to decide is: do I buy this card that everyone is talking about?

If you want to be able to act on hype, you need to be tuned into coverage.  Being on Twitter is invaluable, and following a wide variety of pros from all of the teams is a good way to hear about hot tech.  While the financial people (myself included) are good at discussing things that are “newly known quantities,” we should not be your primary source of information.  If we’re talking about it, you can be sure at least one person has bought in heavily on it.

If you’re reading something that says you should be buying a card right now, understand that the author has probably already bought in heavily and will profit further as they convince more people to buy in.  Thus, their goals do not align with yours.  Someone will be left holding the bag when the hyped cards return from their stratospheric levels.  The author’s goal is to get the card as high as possible so they can sell out.  Whether you’re the second person or the last to buy after the author does not matter to the author’s selfish goals.  They benefit from you buying regardless of when you do so.  Does that mean because they’ve bought in that you shouldn’t buy?  Not necessarily.  It does mean that you should be skeptical of their motives.

The two previous examples should also give you an idea of the problem with hype-based speculation.  Your window to act is VERY small.  If your trade last more than a couple days, you’re no longer in hype-based territory.  If you’re not one of the early birds, you’ll not only miss the worm, but you’ll also be left holding the dynamite.  I wonder how many metaphors I can mix together to make this point. [ed: I'm using this at work ASAP]

Hype speculation also requires an ability to act immediately and decisively.  Your window for action is approximately 30 minutes to an hour.  Once discussion about a card as a spec target starts on Twitter, most of the bots have been bought out.  At that point, you’ll still grab some, but you’ll miss out on the large quantities.  Bot raiding on Magic Online is highly competitive.  I want to suggest an Olympic Event for bot raiding, but that might be a little extreme.

The worst part of hype spec is that after all the running around, you’ll still miss on occasion.  Like fundamental speculation, there are times where hype just doesn’t work out.  Imagine if Patrick Chapin, after the Round 1 buzz, had gone 3-3 instead of 5-1 in Standard.  Would those Olivias have done me anything?  Probably not.  I probably would have sold them the next day at the same price I bought them for, losing the bot spread in the process.  I took a gamble that Patrick Chapin was right.  That’s the gamble that you take with hype speculation.  Are they right?  It would seem like a given that whatever Channel Fireball chooses to play is a good bet, but that’s not always true.  They flopped at Barcelona, although that appears rare.  Still, this serves as a good reminder that things aren’t always going to be that obvious.  There is still risk involved.

Concluding Thoughts

The most important part of any spec when opening and closing a trade is “why?”  Why is this card unique?  Why is this card undervalued?  Why do I like this card more than others?  It’s equally important to ask “why not?”  Playing devil’s advocate with yourself (or getting a friend who’s also interested in Magic finance to have a discussion with you) is invaluable.  If you think a card is a good buy, approach it from the angle of “why not?”  Why shouldn’t I buy this?  Why does my opinion differ from everyone else’s?

It’s okay to make things up as you go.  Sometimes, you’re going to reach a different conclusion than where you initially started.  That’s the point.  I’ve talked myself both into taking and into avoiding cards I initially wanted to buy.  Just like in a game, you need to trust your own decisions.  Does that mean it’s the best play?  Maybe, maybe not.  You should re-evaluate later.  The best you can do is come to your best line of action.

Hopefully this provides some food for thought until we move onto the more technical things, starting with measuring risk.

Practical Advice of the Week (Also known as PAW, because I love dogs.)

Before we wrap, let’s talk about Tree of Redemption.  Magic Online Tree of Redemption has been a solid 2-ticket card for quite a while.  This very website sells paper ones for $0.74.  Why the price discrepancy?  Tree of Redemption has consistently found its way as a one-of (sometimes more) into the sideboards of Block decks and occasionally Standard ones too.  Block is significantly more relevant online than paper, but it’s rare that digital cards from redeemable sets are worth more than their paper counterparts.  Maybe paper Magic is lagging behind.  Maybe Magic Online overvalues it.  Whether the paper copy rises or the digital copy falls remains to be seen, but we can reasonably expect that their prices will converge.  I will leave it to you to decide if you think paper Tree of Redemption is a good buy or if the digital one is a sell.

~ Joe Spanier ~

Find me on Twitter @FoundOmega

P.S. If you want to engage me in longer discussions about anything here, the comments are usually better than Twitter because I can write longer replies.

P.P.S. I’ve been asked for my works cited.  I’ll see what I can do for next week.  Might need to cite some of my economics textbooks.

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