Magic: The Gathering allows for speculation because it creates a market that is both inefficient and volatile.
I suspect most of us realize we can make money with Magic cards because of predictable fluctuations in individual card pricing and inefficient pricing. In this article I am going to describe an asset allocation model that will allow MTG speculators to take advantage of pricing inefficiencies and predictable fluctuations while protecting against total loss.
Inventory & Cash
The first thing any speculator must do is determine the value of their MTG assets. I am conservative and use dealer buylist pricing when valuing my own cards. While conservative, this helps me approach a real liquidation value for my inventory as well as allowing me to meet my own minimum cash requirements with ease.
Managing risk in MTG means maintaining a healthy cash position. The most practical use of cash when increasing the value of your Magic inventory will be the direct purchase of cards from distressed sellers. Cash will also allow you to take large positions on spec targets quickly compared with trading into a new position.
By maintaining a cash position that is a percentage of your MTG inventory value, you will be actively managing the risks of maintaining your card inventory. Selling cards as they increase in value to maintain a 30% cash total portfolio value will ensure you don't grow inventory too quickly while taking on too much risk.
Segmentation & Allocation
Take a similar percentage of assets approach to further segment your Magic collection. This segmentation should be used to reduce risk by either spreading exposure to multiple Magic markets OR insuring that you make similar smaller sized spec bets versus one large speculation bet.
I maintain an inventory made up of 30% cash, 5% MTGO, 40% Standard, and 25% Legacy. My small MTGO position is the result of my inexperience in the market and the forced currency conversion. While I do not maintain a Modern inventory presently, that market seems the most likely to grow.
Considering growth upcoming in Modern, I plan to reallocate my investments such that I maintain the following asset allocation model: 30% Standard, 30% Modern, 20% Cash, 15% Legacy, 5% MTGO.
Develop an asset allocation model that most efficiently hedges your risks. Allow it to be informed by your assumptions about a particular market. These models are best used as quarterly rebalancing guidelines for your inventory.
Your local market should obviously inform your allocations. While Modern play is already as popular as Legacy in my area, trading Standard cards is where I extract the most value from my inventory.
I am hedging away from Legacy because it seems fully priced. While that means I'll continue to trade for Legacy staples, they will quickly be converted to cash or their Modern equivalents. I am going to try and fund any future MTGO speculation with sales out of Legacy and Standard but will cap future investment to 10% of total returns.
If you prefer to make big bets on single cards, you can create allocations specifically for such speculation. I would encourage you to consider how much of your total investments any particular card represents and make sure it never exceeds 5% of your total assets. Alternatively you could allocate 30% to Heavy Speculation and break that 30% up into individual card specs.
Applying asset allocation models will not only help you manage the risks you assume, but also make it easier to track your profits and break those profits down by sector. Come rebalancing time, you can actively invest more into higher return markets and reconsider allocation percentages based on past performance and future expectations.