Insider: Value versus Price

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By: Matt Lewis

The relationship of price to value is slippery. Value is subjective while price is objective and measurable. Value is innate to a card, while price is the market's attempt to quantify that value. The trick to successful speculation as a value investor is to identify when there are large gaps between value and price. When this is true, there is opportunity for a profitable investment. Every card on MTGO has value, but not at every price. Similarly, at a given price every card has value.

Following careful analysis of a particular card and its potential, one can make an investment decision. If prices are far below what the value of the card is, then it's time to accumulate that card. On the other hand, if prices are far above the value of the card, then it's time to start selling that card. If one doesn't own any copies of the card there's nothing to be done but wait for circumstances to change.

As an example, Visions of Beyond is a new card printed in M12. Its initial price at the start of the online pre-releases is around 3 tix*. This card does not have much value as an investment at the moment because it is well understood. It is a conditional Ancestral Recall, the most efficient card drawing spell ever.  This is a case of players being optimistic about a new card's potential, while downplaying the conditional aspect. For there to be value in this card as an investment, it must turn out to be better than people originally think. That is a tall order for a card compared to Ancestral Recall. When looking for value as an investor, it can be found in cards that are over looked or out of favour, and Visions of Beyond is neither at the moment.

A value investor will re-evaluate such cards in the future. It is easy to imagine the conditional aspect of Visions of Beyond turning out to be too cumbersome. In that scenario, it turns out to be worse than players imagined.  This results in it losing appeal as a playable card with a subsequent decline in prices. When prices fall it's time for value investors to pay attention. As prices drop, a value investor will consider whether the market has started mispricing a card. When the market swings from euphoria to despair, value investors see speculative opportunity. If Visions of Beyond does not see play in Standard in the coming months, and prices fall to under 1 tix, it will begin to have some value.

Warren Buffett was faced with an illustrative situation in the 1990's. Market prices for dot com stocks swung wildly around as the tech boom rolled out. A new paradigm seemed to be taking over in business and the stock markets. Companies without a cent of revenue had astronomical stock prices. Everyone believed there was a lot of value in the dot com stocks and their prices reflected that. Buffett did not agree. He did not have a good sense of how to determine the value of a dot com company. Any company he did not understand was inherently a risky prospect as an investment. He declined to take any positions in them at any price.

Meanwhile, prices on dot com stocks rose higher and higher and the returns Buffett saw on his old economy investments languished in comparison. He was derided as being 'out of touch' and 'old fashioned'. However, the dot com boom was followed by the dot com bust in the early 2000's. The crash reflected a realization that the new economy had not yet arrived and that many companies would never earn any money. A rapid realignment of value and prices occurred, and Buffett went back to being the 'Oracle of Omaha'. He had stuck to his analysis, stayed away from dot com stocks, and bided his time. Buffett's confidence in his knowledge and patient outlook allowed him to preserve capital while others lost fortunes.

This lesson illustrates that it is important to understand and be comfortable with one's investment strategy. Value investing has a proven track record but it can be hard to implement value strategies. Taking investment positions that are contrary to what the market is doing can be challenging. Without a firm confidence in one's analysis it is easy to be swayed by market sentiment. It takes courage, discipline and sound judgement. Buffett did not make a penny off of dot com stocks, but he didn't lose a penny either.

Hunting for Value on MTGO

Due to the fluctuating standard metagame, decks come in and out of fashion on a regular basis. This results in cards rising and falling in price. Rarely does a single deck dominate for an extended period, so a shifting standard environment is something a value investor can rely on. This feature of Standard constructed play means that symmetric card cycles are a great place to look for value. Cycles with a lot of utility such as dual lands are particularly good for this.

Since the banning of Jace and Stoneforge Mystic, there have been large moves in the price of Scars of Mirrodin (SOM) dual lands. Currently, Seachrome Coast is cresting, but previously Darkslick Shores and Blackcleave Cliffs have seen spikes in price. Right now, Copperline Gorge and Razorverge Thicket are priced at a large discount with respect to the other SOM duals. At their current prices of 0.33 to 0.50 tix they hold some value. A low price relative to other, similar cards is a good starting point for an investment. Further analysis is required before taking a new position though.

When making an investment, it is important to get a sense of the downside risk. The current price of Copperline Gorge and Razorverge Thicket are at all time lows for constructed playable, non reprinted dual lands. The chances of them falling further are near zero. The upside potential sees them at 1.50 to 1.75 tix, which is the recent peak for the other SOM duals. In the short term, both the Gorge and the Thicket hold value at their current prices. This is enough to take a position in these cards moving forward. However, the analysis is incomplete without extending the time horizon.

Long term, the potential of these two cards is harder to judge. Innistrad is still unknown to us, and it is possible that there will be a new cycle of dual lands in that set that outclass the SOM duals. This would put a crimp in demand and limit the upside potential of the SOM duals. However, it is also possible inferior or even no dual lands at all are printed.

In that case, SOM duals will be essential to the Fall Standard environment. This would neatly coincide with a reduction in supply as limited play moves on to Innistrad. Under this scenario, SOM duals would have a floor of around 1 tix, and a probable ceiling of 2.5 tix. In that range, the whole cycle has value at current prices, but it is a gamble. Stick to minimizing risk until better information is available. Regardless of what Innistrad brings, Copperline Gorge and Razorverge Thicket fit the bill as a value investment.

*Prices current as of July 28th, 2011

3 thoughts on “Insider: Value versus Price

  1. As an update, both Razorverge Thicket and Copperline Gorge have firmed up in price, now sitting at 0.80 tix and 0.60 tix respectively. Although the best opportunity to pick these up cheaply may have passed, I hope that people can understand the process and apply it to new situations moving forward.

    1. Thanks! I think price moves have higher variance online, but generally are moving in the same direction as irl. Cards that are out of favor dip lower, and cards that are in favor spike higher, relative to their mean.

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