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Insider: Managing MTG Speculation Risk With Asset Allocation Models

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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.

Betting

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.

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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.

mathieu malecot

Mathieu is a daily trader of options/stocks, selling both bearish and bullish options. Lead wrangler of "The Kitten Ranch", as in lives and works at home with two annoying and cute (annoyingly cute?) cats. Ranch motto: "Always Feline Awesome". Playing magic since beta/ high school. Casual player and regular participant in FNM drafts.

View More By mathieu malecot

Posted in Free Insider

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5 thoughts on “Insider: Managing MTG Speculation Risk With Asset Allocation Models

  1. Where/How to you position cards that belong in different categories. Example = Deathrite Shaman (Standard, Modern and perhaps Legacy), Shock Duals (Standard and Modern), Griselbrand (Standard & Legacy)? Do you put them in the “hottest” category or the more “stable” category (*)?

    (*) If so, do you consider Legacy > Modern > Standard? Where does EDH fit?

    1. WeQu, I put deathrite into modern because i am conservative. you can put it wherever you see fit. the reason i love cards like deathrite is exactgly because i expect it to see play in every format. for me this means it is a very safe bet. compare that with hellkite.

      in the short term i expect there is good money to be made picking up thundermaw hellkites on the cheap and flipping as red decks pick up momentum. but is hellkite playable in legacy? how playable is it in modern? compared to snapcaster or deathrite shaman it is a much riskier investment if only because the trading window for it is much smaller.

      another thing i think about when considering where to put cards like shockland: price history. right now they are worth more than they’ve been worth thanks to standard. as a result i’m likely to consider them standard cards. as they decrease in value and approach prices before rtr was spoiled i’ll likely put them into modern.

      ultimately, you must decide where you put cards that hit multiple formats. just make sure you put them in categories that hedge your risks and get you to your individual allocation goals cheaply.

      1. just like to add, i can maintain a low legacy position because much of its card pool is also modern playable. for legacy and vintage i tend to call legacy things that are only playable in legacy and vintage. vintage, a bad investment in my mind ’cause it’s player base is too small, is made up of those few cards available only in vintage. that makes sure cards that are legal across formats but see only lay in vintage don’t get picked up.

  2. I always love when my forum questions are turned into articles ! I was wondering though if you consider your private collection/decks into the model or not ? For instance we all know that eventually we’ll be selling our standard decks but most likely at an unavoidable loss.

    1. i don’t consider things i collect an investment. for me their is a clear distinction between a magic inventory and a magic collection. if i am putting a deck together for an event, sure i’ll use cards in my inventory. but as i add cards to my spanish inquisition deck (which i have no intention of trading off), i am not adding cards to my inventory.

      even in the case of the spanish inquisition deck, i personally would sell off cards if their values spiked. i just don’t actively make those cards visible when i am trading/selling cards. i want to maintain the deck, but if someone offers me 3 X the value of something, i’ll sell and re-buy pieces.

      i don’t maintain standard decks except as my inventory allows. that is why i run crazy homebrews. i am too busy selling armada wurms and thragtusks to play with them. i played an all in combo psychic spiral deck at a local GP trial without epic experiment. i don’t particularly like that card, but might have played it as a one of if i didn’t just flip them to a dealer for a 33% return in 7 days. generally, i draft on FNM. i win regularly and it doesn’t require me to hold onto cards i’d rather turn into cash/ modern staples.

      3-2-1 with my all in combo deck. finished 11th, two 12 point players also missed top 8. one loss and a draw to people that made top 8. combo is good against control with bad counters (syncopate being a tempo counter imo). also clone is clutch tech. i only ran 2 MD which was a terrible mistake as i went to put 2 more in from the SB in every match but one after game one.

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