After reading Sigmund's article on the subject I got to thinking about perceived risk, and more specifically the asymmetry between gains and losses. Thursday I watched a company lose more than 50% (it did rally back some before the market close) of its market cap in a single trading day. I think the market actions and the following Sigbit are further proof that it takes time to drive up prices and very little time to drive them down:

I for one am completely shocked at the price of some Duel Deck products. Elves vs. Goblins ($249.99), Divine vs.Demonic ($149.99), and Jace vs. Chandra ($99.99) have all paid for themselves many times over. I wish I had these! Meanwhile Ajani vs. Nicol Bolas, Venser vs. Koth, and Phyrexia vs. the Coalition have all been a bust. Fortunately the rest have also increased marginally in price. This is why I see investment in these products as somewhat risky – you could increase your money fivefold or sit on a stagnant position for years depending on what you buy!

Sig offers a great example of why prices rise slowly; lets just do the math on those Duel Decks: $150 for Elves vs. Goblins, $100 for Jace vs. Chandra, $120 for Divine vs. Demonic, $45 for Garruk vs. Liliana, 24$ for Phyrexia vs. Coalition, $42 for Elspeth vs Tezzeret, $40 for Knights vs. Dragons, $31 for Ajani vs. Nicol Bolas, $17 for Venser vs. Koth, $18 for Izzet vs. Golgari, and MSRP for Sorin vs. Tibalt. Average value of random Duel Deck is $55, with nine of eleven fetching retail or greater. With average gains of 275%, this is only considered risky because we are placing too much weight on negative returns. Since inception (2007) you are looking at 45% annualized returns. 

Learning from Mistakes

Over emphasizing loses is the human thing to do, and I am not writing today to convince you to ignore downward price action. Ask yourself the following question: If I told you that tomorrow you had 50% chance to lose all of $1000 and offered you insurance at $500 to guarantee you'll keep $500 instead of risking a total loss what would you do?While mathematically there is no right answer, if we approach our investments by risking total loss we risk more than another $500 - we risk the opportunity to recover our losses.

So, keeping in mind what we've covered, I'd like to come up with a MtG portfolio that uses an understanding of price action and human psychology to help us better evaluate risk/reward and offers us a hedge - or at least an exit strategy. It is very difficult to hedge a Magic investment as you are of course hoping the game maintains its popularity and collect-ability. That said, there is a real floor to pricing most cards thanks to buylists and bulk rates.

The Sample Strategy

Lets start with $1000 and supplement our investment with $10 every month. That 10 dollars will help us re-balance the portfolio and keep us open to fresh investments.  I will split my portfolio up into three parts: sealed product, cards to flip and cards to save. My favorite part of this portfolio is sealed product, because it requires so little card evaluation on my part. I intend to spend $333 buying X number of Y Duel Decks. I will spend no more than retail for these duel decks and should I find myself able to purchase more than one type of Duel Deck, I will spend the same amount of cash on each Duel Deck type.

I get to make a couple of interesting choices using Ebay's expired auction data. Buying complete displays offers a discount most of the time and with single copies of Sorin vs. Tibalt commanding as much as $24 while other copies are available for $20 these look like a good bet even if I give up other decks. With the recently announced Heroes vs. Monsters scheduled for a September release I have six months to move my inventory, extract any value and diversify my sealed holdings. Assuming I can  sell half of the sixteen at $24, I should end up with enough cash to purchase 10 copies of Heroes vs. Monsters leaving me with an 8/10 ratio.

Cards to flip are those cards that have already shown plenty of price volatility. The best Standard example I can think of is Angel of Serenity. This card is worth picking up to flip come rotation. While the next block could remain as fast, keeping the price down and the flip off the table, an Angel that has a powerful ETB effect and is reanimation friendly will worse case get moved out of cards to flip and into cards to save. If Deathrite Shaman could get under $10 on Ebay another potential flip target emerges from Standard. My last article for Quiet Speculation explained my favorite kind of flip: low run collectibles.

Unfortunately the easiest way to get value from those kinds of flips requires you to do more than find a card at the right price. You've got to build relationships. While there's no easy way to do that, playing casual EDH games and being super friendly at your local shop (even in competitive drafts) will pay dividends. Start a Facebook Group for regulars and invite new players. Use that group to get people in the shop to trade and play with on days other than Friday. Creating a welcoming atmosphere will win you the shop owner. They are going to get first cracks at collections more often, but if you play nice you'll find a valuable resource for buying and selling cards. Take advantage of local demand. Pick up what is unpopular and let the internet help you extract value.

Cards to save are pretty easy to identify. They are playable across multiple formats. That means you want some combination of EDH/Legacy/Vintage/Modern staple. Generally I avoid hot Standard +1 cards because standard with drive up prices too quickly. Once you've identified your targets pass them through one more screen: are they on sale. What negative factors are weighing the price down and are these justifiable? For example: Kitchen Finks might see a reprint soon and there is some downward price action as a result. In this case, I hold off any purchases until Modern Masters is released. Then I buy up cheap staples thanks to the perception of too much supply. Presently I will remain boring and buy up copies of shocklands under $10.

But Never Forget...

While getting totally wiped out in a Magic spec is difficult, don't be afraid to buylist under-performing cards. You are there to make money and and assets you have in your portfolio needs to pay rent. Why hold on to a loser with a new set on the way? Take the loss and pass on the recovery so you will be able to pounce on the next opportunity.

Use the $10 added a month to help you re-balance your portfolio. You probably want to spread your investments across the three classes evenly every three months, unless you find and expect one asset class to consistently outperform another. Finally, spend some of the money you make if you are doing this for more than just giggles. Taking profits out of Magic will offer you a better hedge to your Magic investments than coming up with another MtG "asset" class.