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Alexander Shearer – Building Your Long-Term Portfolio

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Alexander Shearer, of Channel-Fireball.com, has graced us with a guest post!  Alex is one of my personal favorite writers on the web, and always offers a brilliant angle on whatever it is he speaks on.  --KBR
 

I don't sell cards all that often.

Don't get me wrong - I do sell them on occasion. There are cards I end up with as prizes, leftovers from Limited events, and basically any foil I ever get is going on to greener pastures with people who like their cards shiny. But at the end of an Extended season, you didn't see me selling off my Damnations, nor do I plan on liquidating my Ravnica duals in exchange for credit at the local card shop.

Even so, I pay attention to card prices, and not just in the sense of trying to find the best value as a new set is released. I'm paying attention to prices throughout the year, regardless of the current format, and even if you aren't interested in trying to run an active card selling business, you'll want to pay attention to them, too.

 The Pain of Inverse Arbitrage

I know a lot of players engage in very active buying and selling with their collections. As they head into a Constructed PTQ season, they pick up the cards they need. Once the season is over, they cash back out, either selling those cards online or trading them in for credit at the local shop.
This is, by and large, a terrible idea.  [Unless you're selling them to me, in my shop, obv. --kbr]

I like to call this practice “inverse arbitrage.”  I'm misusing the term a bit here, but arbitrage is essentially all about exploiting a difference in price between two markets. In larger-scale financial terms, this often has to do with exchange rates or commodity prices. In Magic, sellers tend to practice arbitrage between different times. For example, if you bought one hundred copies of Dark Depths in July of last year, you paid about $200. If you then turned around and sold them after Pro Tour Austin, they went for about fifteen bucks each and you netted $1,300.

I don't know what possessed you to buy a hundred copies of Dark Depths in July of 2009, but congratulations, you made a 650% profit.  Now consider what you're doing when you buy into and sell out of formats as they come along. You're essentially letting someone else arbitrage you.

Let's say you had wanted to play Zoo in the PTQ season for San Juan. The season started in January and ended last month.  If you bought four copies of Lightning Helix in late January, you probably paid about $8 for the set. If you were able to then turn around and sell them at the going market rate in early April as the season wound down, you probably earned about $6.80.

I say “if you were able” because if you're selling them on eBay, you're paying eBay a cut, and if you're selling them back to your local store, you're assuredly not getting market rate. If your store is pretty generous and gives you half the current market rate, then you're getting $3.40. That's 42% of your initial buy-in.  Taken on a case-by-case basis, that doesn't seem so bad, but projected across all of your Magic purchases, well, having more than half of all your money just vanish into thin air seems pretty awful, doesn't it? In fact, even if you're actually good at timing your cashing out such that the market rate is equivalent, you're still going to lose money on the deal - either from that eBay cut or your store's credit markdown.

The Cost of Transactions

If you have any stocks or other investments, you're familiar with the finance world's version of the problem I've just outlined. Selling some stocks? Congratulations, you get to pay capital gains tax. Buying some stocks? Now you get to pay a trade fee to your brokerage. The upshot of these factors is that even if your investment values are relatively flat, you still bleed money every time you cash out of one thing and buy back into something else.

Buying into and out of Magic formats is actually worse than trading your investments all the time. At least with investments, if your value goes down, you can claim the loss as a deduction for future taxes, even if you still have to suck up the trade fees. When you do this with Magic formats, you don't get to “write off” the drop in price for future transactions - you just eat the loss and move on.
For the average investor, the best approach is almost always to not try to cash out and buy in all the time, but to set up a system and just tweak it every so often. One reason is that you're terrible at timing the market.  Did you know Dark Depths was going to suddenly spike twenty-fold in price, and then keep creeping up from there? Of course not, because you didn't know Vampire Hexmage was going to be printed in Zendikar. Similarly, you can't predict which new Silicon Valley startup will skew the market three months from now, so you don't know to buy their eventual suppliers' stock now, while it's cheap.

Rather than making money, the average investor who tries to do this will just be eating a lot of trade fees. By analogy, the average Magic player who frequently buys into and cashes out of formats is going to hemorrhage value to the eBay slice, the store markdown, or simply drops in the market value of their cards as a season ends.

The Magic of Long-Term Investing

Warren Buffet has an excellent quote about investing - “Be fearful when others are greedy and greedy when other
s are fearful.” It's a good mantra for any long-term investment, and it plays into both how I fund my own investments and how I buy cards.  For my investments - say, my retirement, for example - I don't worry too much if the individual share price in an index fund I'm investing in goes down. Sure, that might be bad if I were cashing out right now, except that I'm not cashing out right now. Instead, a reduced price right now represents an opportunity for me to buy more shares which will, in turn, be worth more later.  I don't tinker and try to chase the market, but if the opportunity arises, I may sink some extra money in when a price goes down and I can get shares at a bargain.

I do the same thing in Magic. I pay attention to prices because I'm looking for value, not because I plan to cash out. After all, I'll almost certainly want those cards at some point in the future, and as I discussed above, the costs of buying in and cashing out are very, very high. Instead, my strategy is to buy cards for the best possible prices as I go along, and then just hold onto them. In fact, my approach to buying into any new set is based on this idea.

I always buy a full common and uncommon playset for each new set. This can run anywhere from $30 to $60 depending on the size of the set. This might initially seem like a big chunk of cash to drop up front on commons and uncommons, but it pays off later on. For example, if you wanted to buy a common/uncommon playset of Conflux when it released, you could have done so for about $30. However, by the middle of the most recent Extended season, you would have dropped $20 just to pick up four copies of Path to Exile. That's two thirds of your initial price for all the commons and uncommons, just to get one uncommon.  Sure, you might be able to trade them back in, but as of the end of the PTQ season the price for a playset is $18 and dropping rapidly…and, of course, you might get half that at your local store.  Then imagine if you need them for another Extended season next year. That's a lot of money bleeding away with no return for you.

So I buy my common/uncommon playset, then I try to find the best possible prices on the rares that I want to pick up. If I think a rare may be an eventual staple and it's cheap now, I'll pick it up. If I think it's overhyped and will go down, I'll wait. I have no special insight into this part of the process - it's why I read Magic trading and finance sites.  The real trick is that I'm never going to sell these cards. It's just not worth it. Instead, I'm going to keep building my collection, picking up cards when I can find them at a price I like. This is why I make a point of checking in on prices regularly, even on formats that aren't active at the moment. After all, I may not be playing Extended right now, but I'm reasonably sure I'll want to later.

Case in point - I picked up a Fifth Dawn set for a ridiculously low price a while ago during the lull between Extended PTQ seasons. Fifth Dawn was part of my normal checklist of “stuff to look for,” and I ended up lucking into a set for less than what you'd pay for one copy of Engineered Explosives now. I say I “lucked into it,” but of course I gave myself an opening for that luck by being “on the market” for these cards during the off season.

The default argument for not buying cards this way is that you can't afford to. I honestly don't think I could afford to do it any other way. I don't have the time or the money to be continuously buying into and selling out of sets and formats. Remember that it is both time and money. You will lose money on this as you buy in while prices are rising, then cash out at a significant loss later on. You'll lose time if you put in any effort to minimize the money loss, as you'll be chasing the best price on Path to Exile not just once, but repeatedly each time a new Extended season comes up. And time spent doing that is time not spent playing the game, or maybe even making more money proactively somewhere else.

In contrast, if use the end of the current Extended season as an opportunity to buy your playset of Watery Graves, you'll do so at a significant discount and you never have to buy those cards ever again. When Extended rolls around next year, you have your Watery Graves. When it rolls around again the year after that, you have your Watery Graves. And you didn't bleed money buying and selling them over and over again.

The Bottom Line

I like playing Magic. I like thinking about playing Magic.

I facilitate both these things by making it as easy as possible for me to focus on the game. A big part of this is making sure that my purchasing process is low effort and yields high value - very much like the arrangement I want for my long-term investments.  The old stock adage is “Buy low, sell high.” For the typical Magic player, I'd amend that to simply say, “Buy low.” Buy low and then don't waste your effort trying to cash out when a season ends. You still love Magic, right? You're going to be playing it in a year's time, right?

Right.

So as the Extended season ends, shelve that knee-jerk desire to sell off that Dark Depths deck you've been playing. Instead, ask yourself if you'd like the option of playing Zoo next year. If so, it's a great time to pick up your Lightning Helix playset at a steep discount. You could even make another gamer happy by buying it off of them for slightly more than they'd get from a card shop - while you still keep the savings.  Pay attention to prices, think just a little bit ahead, and you can buy low, keep, and never have to worry about paying six bucks for an uncommon you used to own ever again.

Notes

I used the price tracking tools from Black Lotus Project for my examples in this article. Black Lotus Project scrapes card prices every morning from the Magic Online Trading League's card price list and displays it in a stock-market-style visual interface. Spend some time playing with the display tool there to get a feel for how card values shift in parallel with set releases and different Constructed PTQ and other event seasons.  [They actually use the same software that Google Finance uses! --kbr]

If you're a typical Magic player, you should be thinking about your own long-term finances, but almost certainly aren't. You may think you're not in a position to invest for the long term, but you are. If you'd like to learn more about becoming wealthy using tools that are tailored for you, check out I Will Teach You To Be Rich. You'll find a giant pile of useful, actionable tips there that will make you more effective at finance - both in dollars and in cards.

About the author

Alex is a biologist and gamer who writes the In Development column over at ChannelFireball.com as well as writing for his site, Gifts Ungiven. You can also follow him as @parakkum on twitter.

Kelly Reid

Founder & Product Manager

View More By Kelly Reid

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5 thoughts on “Alexander Shearer – Building Your Long-Term Portfolio

  1. Sweet, that's exactly how I do it, too. Picked up a playset of Dark Depths for $8 total at a local shop when I heard about it potentially going up (the shop only had four, boo), and I'm still sitting on them. Haven't really played them much, but $8 is not much, and I hope to play with them at some point!

  2. Cool article! I think it's worth mentioning that you can really do this only if you have a large budget. You can apply this advice to Legacy – if you want to play the format now, buy a full set of the duals, since they will forever be going up in price. However, if you never ever use those Plateaus, then you better have enough money to cover buying more cards while those sit there, unused. It's like how buying a stock like Berkshire-Hathaway is, on paper, a stupid idea; no dividends, no liquidation, price based only on fantasy that company will sell or liquidate in my lifetime, but still a dependable stock. If you buy Berkshire and still want income before you finally cash it out or die, you gotta have enough money to roll into other stuff in the meantime.

  3. Are most players who play a format other than standard that short term in thier mindset? The best advice in this article is "buy low and buy lower." This is especially apparent with the prices people are paying in pre-sales right now. I think 2 cards in all of RoE went up, the rest have gone down. Once everything bottoms out, the cream will start to rise and you'll know what you need to buy. That isn't Arbitrage that's just smart trading.Arbitrage is a bad word for what he's describing. Arbitrage is what dealers do when they buy 10 cases and convert them to singles. You're adding value by changing liquidity. I play standard and block constructed. I do the same thing with the uncommons and commons because nobody usually has them to trade, but when it comes to trading away tournament staples for next year's big thing, I'm more than happy to do it. Sure I'll take things like shock lands on trade for standard stuff because I know I can trade them for more standard stuff later. Extended cards like this are a way to "park" value. I couldn't understand someone trading thier extended stuff away at the end of the "season" only to buy it back next year, but when those cards rotate from Extended, you can bet if they don't have a home in some eternal format, they were traded at the beginning of the last season.

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