Quiet Speculation: Wall St. Wizardry

Some articles about Magic teach you how to play. Others teach you what to play, and others still tell you what to buy. I love me a good metagame analysis, and I know that my editors would love to see 500% more deck lists, but my favorite sort of Magic article is the sort that teaches you a skillset. Knowledge and understanding are more valuable than short-term information, especially when you are playing a “long” game.

The concept of the “market watch” article was fairly uncommon when I started writing about Magic, and was unheard-of when I started reading about it. The internet is both medium and facilitator in this case; the internet is what allows a market to exist and what guides prevailing wisdom. The price guides that were once featured in magazines like Scrye and InQuest (whom I blame for my desire to write about Magic in the first place) were almost worthless because their methods were inaccurate. Mailing surveys to stores across the country was the best method technology would allow, and the information quality suffered as a result. Now that telecommunications allow a savvy trader access to the world’s information through mobile tools such as the smartphone, it’s about time that the methods Magical price evaluation caught up. The first step to updating your mental framework is understanding why Magic cards are so much more than pieces of a game. They’re actually investment vehicles, just like the things you hear about on CNBC all the time.

I should note that before I continue, the little lawyer that lives inside my brain is telling me to inform you that I am not a licensed securities dealer or anything like that. My references to NASD and FINRA licenses are not meant to suggest that I currently maintain these licenses. I am merely using them as references for my source of some information. It does notsuggest that any of my advice is in any way to be considered investment advice. I am just a guy who owns a card store. Call your stock broker for investment advice, not me. I should also note that in many cases, I’m grossly oversimplifying some concepts to appeal to the laypeople who read my work. I know many of my readers work in financial industries. Resist the urge to correct these oversimplifications;they’re just examples.

Now that we’re clear, let’s figure out what I mean when I compare a card to a security. Publically-traded stock is the most common form of investment vehicle that most of us are familiar with. There are also things like mortgages, certificates of deposits, options, bonds, and so on. Basically, an investment vehicle is any sort of product or service that can potentially grow the value of your money.

I’ve intentionally left vague the definition of investment vehicle because I want to highlight that the term is very versatile. Is a house an investment? Maybe, if real estate prices are on the rise. Maybe it’s an investment for the bank, who makes their money regardless of the price of the real estate by writing a contract against the value of the house in exchange for capital availability. That’s a mortgage. The only real things that define an investment are time and potential. Is a house a “good” investment? That’s hard to say, because “good” is subjective as investments go. In a bull housing market, you can consider flipping a house in a few years. It’s a bad investment to buy a house in a bear market if your goal is a quick double-up in 24 months, but it’s a great investment if your goal is to protect some money and make a stable gain in 10 years. One of the main things I teach when I talk about business is the concept of separating “value judgment” from fact. Just because something is an investment doesn’t mean it’s good or bad.

Just like I believe there are no “bad” cards, I believe that all investments have upside and downside. A unique combination of factors specific to the given circumstance will determine “good” and “bad” for the individual making the assessment. Therefore, it is unproductive to talk in terms of value judgments like good and bad, and we should talk more about what makes the system work as opposed to judging its individual components.

With that little diversion into the world of real finance done with, we can start drawing parallels to Magic cards. Imagine that a Magic card is like a stock. A share of stock is equal to 1 portion of the specified corporation. The percentage of ownership granted has to do with how many other shares exist. It’s not meaningful to own a certain percentage of the company in Magic unless you own so many of a card that others cannot obtain copies. This seems unlikely and has never really been an issue with in-print cards (the cards we are concerned with). Just as a share of stock has a monetary value, so does a Magic card. The stock’s price is, ideally, indicative of the company’s underlying value. The more the company is worth, the more the stock is worth.

A Magic card doesn’t indicate to me that I own a company or anything, but it still affords me the option to use the card in competitive play (due to the rules of sanctioned DCI events). Thus, a card’s demand is mostly drawn from the volume of people who want it to play in their decks. There are many formats in which a card can be played. Vintage, Legacy, Standard, Extended, perhaps Hyper-Extended, EDH, 2HG, Kitchen Table, and the list goes on. A card’s value is a function of its level of play in a given format modified by that format’s ubiquity. That is to say that a card that’s a 4-of in many Standard decks will create more demand than a card that’s a one-of in many Standard decks, and will create an order of magnitude more demand than a card that’s a one-of Legacy.

This introduces a number of interesting complications. First, we now have a time-sensitive value. Cards lose a lot of value after they’re 2 years old since they rotate from Standard. The changes to Extended helped offset the drop by increasing the relevance of a given card in that format (halved the depth of the format, doubled the relevance of the cards). We still see a big drop-off in value after it leaves Extended, and we’d be a fool not to consider these time frames when building a business or making a trade. Look at when a Standard card’s price is often at its peak – when it’s pre-selling! When is it lowest? Just before it rotates.

Now that we understand that each card has a value determined by time, we should also look at the Dark Depths case study. A card does not tend to change once printed. Very few cards get banned or receive functional errata while they’re in Standard these days, so it’s a safe assumption to assume that a card will remain with its precise Oracle text for a good long while. Thus, the only way to change what a card can do is to change the cards it interacts with. Dark Depths has always had the same set of abilities. You remove the counters; you get a fatty. Then they printed Vampire Hexmage, which was the only way to knock off all the counters for so little mana, and Dark Depths was instantly transformed into a $40 card overnight. The card didn’t actually change, but for all intents and purposes, it was now a different card, as evidenced by its price.

We can now understand how Magic cards get their intrinsic value, and it is derived from a card’s playability. We also understand how a card’s value changes – either through the discovery of additional interactions or through the passage of time. Just like Pharmaceutical Company A loses value when Pharm Company B designs a cheaper knock-off of their signature drug, Bitterblossom took a hit when they printed Volcanic Fallout.

How do we apply this parallel to our daily trades in Magic? Well, just changing the way we think about cards, as securities instead of individual entities, will change the way we do business with them. For example, it shocks me how many people fail to consider the concept of margin percentage (instead of net) on trades. Margin is not the only metric that matters, but it’s a vital concept to being a good trader. A $2 trade that nets me a buck is great. A $200 trade that nets me $100 is better, but I’ll still take a 50% profit either way. Focusing on margins is the primary piece of the puzzle that new traders miss. Focusing on margin ensures rapid growth.

There’s another financial mechanism that seems to fit the MTG economy- shorting. I’ve wanted to be able to “short” a card before. Going “short” on something is the opposite of going “long” on something. When you take a long position on a security, you’re buying it at X in hopes of selling it at >X down the road. When you’re short, you’re selling it at X (even though you haven’t got any to sell), and you intend to rebuy it at <X down the road when you predict it will be cheaper. If I could short new Planeswalkers when a set releases, I would. Why? Because historically, each Planeswalker has dropped significantly from its presale price with only a few execptions, and the infrequency and degree of the exceptions makes this a viable strategy.

I was musing the exact circumstance, shorting Planeswalkers, when it occurred to me that it’s very easy to do so! You just cannot necessarily short them whenever you want to. Let’s assume for a moment that you want to sell someone a card you do not have, and wait a month or so to deliver it. That seems like it’d be a pretty tough sell for any dealer. “Yes, I take your money now. You get the card next month.” Not happening. If only there was a way to trade for cards without having to fulfill your orders for a few weeks. What would force someone to wait one, two or maybe even three weeks for their order to be filled?

How about if you’re selling them a card that’s not in print yet?

That’s right. Pre-orders are a perfectly legitimate way of making money in our business, yet it seems to be reserved for the big dealers. Why? What’s to stop a trader of repute from issuing his own pre-orders? Assuming he has the trust of his local brethren (or the internet), there is no reason he cannot do this. The big dealers do it all the time, and in the scope of things, it is a rather easy thing to model. Modeling a pre-order system is an article for another day, but let me know if you’d like to read it. Let’s just focus on how to use the concepts to make us some money.

The “long and short” of things is as follows – if you realize that a card’s price is most often at its highest when it is first previewed, and that on average a set’s value declines as it ages, you can clearly see that there are many short positions for the savvy investor. When all three Scars Planeswalkers were pre-selling above $40, it wasn’t hard to guess that their total value would decline, even if one maintained $40 or rose. Thus, why not write a short position on all three? Think Mox Opal is crappy, as many of my readers believe (I am not sure on that card, to be honest…)? Why not take a short position on them and make some money if you’re correct? A trade as simple as “I’ll trade you 4 Mox Opals a week after they release for 2 Jace, the Mind Sculptors today” is a short position. I have successfully executed trades like this and turned truly insane profits doing so. Give it a shot for the next set.

You don’t have to be a big dealer to apply big-money financial ideas and structures to your trading- treating your trade binder like a stock portfolio, and minding things like diversity, liquidity, risk, and short/long positions. The more you trade – in cash or just card for card – the more you will realize that treating Magic cards like investment vehicles is not just “right”, it’s damned profitable too! I hope you enjoyed this departure from the typical “market watch” column, but frankly, there are too many people out there spouting off too many ideas about what is and isn’t a “good” pickup right now. Rather than just give you my opinion of cards to acquire, which is as biased and personally skewed as the next guy’s, I much prefer to write articles that teach broad concepts and frameworks. Half of this game is knowing how and when to make certain kinds of deals, and I assure you that by re-aligning the way you think about Magic cards, you will reap more rewards than a few thousand words of empty and transient “stock tips”. Until next time, keep doubling up!

  1. I doubt it, but it was just an example. A better example would have been 2x Koth of the Hammer (in 3 weeks) for a Jace, TMS now.

    The “book” value is -15.00 on the Jace side, but you’re buying the use of 85.00 for 3 weeks (which can then be leveraged to trade-up and -get- the Koths when they debut, ideally at a lower price.

    It’s basically a form of trading “on margin” (not to be confused with profit margin), where you basically play with someone else’s money for a nominal fee. The problem is that if you make a bad choice (Jace tanks or Koth spikes), you’ll have to meet a margin call! Let’s get this discussion going, though, since not enough people yet understand how to treat Magic cards like securities!

  2. Specialized pre-orders are an interesting idea- only offer pre-orders on cards that you think are going to crash (Time Reversal anyone?! now 2 tix or less on MTGO). I wonder how hard it would be to set up a market within the game. Maybe someone could code a bot to take in tix as credit and allow people to short (with a transaction fee, of course). The trading example is also something that you can do with people you trust (especially if sentiments about the cards are correct).

    I was also thinking, renting cards could similar to receiving dividends, but I have yet to think of a way to make it worthwhile for the renter AND the seller (risk of price changes and time intervals seem like my most serious obstacles).

  3. The problem with shorting Magic cards is that the analogy begins to break down. Trade value aside, people buy Magic cards 95% of the time because they want them in a deck, immediately. People buy stock 95% of the time because they want to hold onto it for days, months, or years, and not do anything with it. You can “short sell” stock because you’ve essentially promised the buyer that it will be in his or her hands by the time he or she needs to sell it. You can’t “short sell” Magic cards, because they don’t need ownership of the card, they need use of it.

    TL;DR: Magic cards can’t be short sold because the utility is in usage, not in ownership and dividends.

  4. My big problem with this is that pre-sale prices rarely come down to where you want them to within a week of set release. The hype is still there, usually, until the first few rounds of tournaments go by.

    What you want is to ‘short’ in pre-sale and deliver ~1 month after release. I really don’t know anyone who’d take that deal, unfortunately.

  5. Kelly,

    Few quick comments. On mtgo there are (effectively) zero transaction costs. Not so in real life. Selling cards either involves fixed costs (cost of postage/insurance via a stores buylist), or variable costs (e-bay).

    It would be very easy for “shorting” to backfire on a local trader. First, you need to factor in that the “shorter” needs to compensate the other person for giving up the cards for two weeks (or whatever the time frame is). For example, if Jace is worth $80 and Koth is pre-selling for$40, then a fair deal might be Jace now for 2xKoth + $5-$10 in rares in two weeks. Second, even if the price of Koth falls far, you still have to produce them within a week of release. You will need to aggressively trade for cards that everyone wants. Third, because the deal is so unusual, if Koth falls to $20 and you make $40, you will likely have alienated your trade partner.