This week we bring you the second part of our article, which aims to cover mistakes that we are all likely to make when speculating. Namely, we will take a look at some psychological factors that might distract you from making the optimal choices. We will also try to provide concrete examples from our experience, to show how important it is to follow a set of guidelines.
The Rules to Follow
Listed below are a bunch of strategies that are both economically and emotionally suitable. These guidelines should help you properly diversify your portfolio. It should also prevent you from becoming impatient or panic-prone when things don't go the way you expected.
The 5% Rule
This one is all about bankroll management. The rule states that you should not, at any given time, invest more than 5% of your bankroll on a single target. This is inspired by poker theory, but you should apply it while trading Magic. We believe investing too much on a single spec is one of the biggest mistakes you can make. First of all, if anything goes wrong, you might never be able to recover. Second, humans act differently when under stress. You’ll be able to stay cool headed if you have only 5% of your bankroll at stake, but can you if it’s 50%?
There is a poker story about an extremely rich man (Andy Beal) who came to the casino and was able to beat poker pros only by raising the stakes. He was playing at such high stakes that even if the pros were actually better than him, they would make different decisions than usual because they were uncomfortable with the money they put in the pot.
The story ends well for the pros though; they decided to regroup all their money and to form a big bankroll. They played against Beal, but as a team. Each person invested the amount of money he was comfortable to invest in the group and they shared the profits proportionally. Once they felt more comfortable, their edge on strategy reversed the steam and they finally won millions out of Beal.
So what can we learn here? Even if you’re the best trader of the world, if you put yourself under too much pressure, you’ll make bad decisions and lose money.
Normally, the 5% rule is perfect to absorb variations. If you have under 1000 tix, 5% is less than 50$ per spec, which is somewhat low for a proper diversification. In fact, diversification is such a crucial concept that we will have to devote an entire article to cover it.
Support Your Calls with a Rationale
Let’s take the example of Cavern of Souls. At one point, the card was available at 4.5-5 tix. Control wasn't making significant showings in Daily Events, so nobody needed the land to avoid counters. A switch in the meta was likely to occur eventually. We had a price memory of roughly 13-14 tix for this land, and sooner or later it would see play again. Buying into this card was showing little risk, given it was at its all-time low, with a full year ahead for a probable spike.
That’s the rationale behind the call. It has to be developed and analysed, but that’s not enough. It also has to be marked down and detailed enough so that you can refer to it in the future. The main things to record are the entry point (buying in the 4.5 to 6 ticket price range), the expected sell point (I would sell at 12 or above), the expected timeline (current season, less than three months) and what should create demand (the metagame shifting towards control).
This brings us to our next point.
The Use of Spreadsheets
The spreadsheet is another way to protect yourself from losing sight of what your mindset was when you committed to a spec. The more details regarding your call, the better. Always make sure to include what supported your decision in your spreadsheet.
You can adapt your files as you wish, but the important thing is to make use of this tool, and to stick to it over time (remember, discipline is key). Our spreadsheet looks something like this: Card Name / Price Paid / Qty / Selling Target / Timeline / Rationale / Price sold.
To maximize profits on MTGO, you have to move rapidly when you detect a spike. A significant portion of our profits originated from short-term investments that were unplanned or unforeseen. Many times in our early days, we ended up with insufficient liquidity to buy early into an ongoing spike. Given our decision not to input additional money repeatedly, we had to either pass on the opportunity or struggle with hard-to-make decisions about selling other targets at sub-optimal prices. The MTGO market is sometimes evolving so fast that by the time you free some tickets, a spike is well underway and it is no longer correct to get in, since the risks have increased and the profit margin got narrower.
To make it very clear, you should have no less than 20-25% of your portfolio in loose tickets, or in the form of boosters. If you have exceeding tickets floating around at the moment, follow Matt Lewis's recommendation and park a few tix in GTC boosters.
Let’s now turn to some costly mistakes one can make.
Mistake 1: Disobey the Rules
It's obvious. Whether you get overconfident with a card, or whether you simply can't resist the temptation to use all of your tickets to buy everything being discussed on the forums, you are managing your account in a sub-optimal fashion. You also increase your level of stress by adding pressure on a single spec. Locking all your tickets on MTGO means that you will have to pass on the short-term flips, which is one of the major sources of profits online.
Adding liquidity by buying extra tickets is not always the best solution, since you are likely to make two big mistakes: 1) getting out of your comfort zone and therefore putting your nerves under stress, and 2) reinforcing your lack of discipline, which might lead to facing the same problem later and having to add even more tickets into your account.
Mistake 2: Targeting the Absolute
Trying to buy at bottom and to sell at ceiling at all costs is one habit that is hard to get rid of. It might sound weird, but you should actually be more flexible about buying or selling at the perfect time. Jeff has a friend who is a stock trader. He says that the most common mistake among new traders is precisely to try to buy at rock bottom and then aim to sell at ceiling. He also said that every trader who tries to achieve this is in fact losing more money than others. While trying to reach the absolute, the new trader tries to anticipate the market variations too much and will end up passing on good opportunities or will buy and sell at bad times.
Many times, we have waited too long to buy our cards. We should have accepted buying the card directly from bots at 0.5 or 1 ticket higher, to take our position appropriately. Knowing that the price is really near the bottom is enough to start buying. Last rotation, we found a good opportunity in Karn Liberated. We knew Modern season was coming up and that Tron would be part of the meta. Karn was 13.5 on cardbot, so we decided to post at 13 on the Classifieds just to make sure we were buying at a lower cost. We knew that at 13.5 tix, Karn was a still a good target, but we wanted to buy at the lowest possible price. What a mistake! We ended up with a sheer total of 5 copies, which we eventually sold at 27 tix each. If we would have simply bought from the bots (our bankroll was high enough to do so), we would have been able to buy an extra 20-25 copies. We would have paid an additional 25 tixs to grab them, but we would have made so much more money in the process!
When determining a buy price, you should target a price range rather than a specific number. Paying a little more for your stronger specs is a fine decision.
Mistake 3: Selling Out of Fear (Panic Sell)
For many reasons, we can overestimate a card's floor price and buy into it too early. Or one card is being reprinted because of Cube events, and you find out about it only after the card has already lost 30% of its initial value. In both situations, the price drop is temporary. Don't resort to panic selling. Refer back to your rationale when you acquired the card. It is almost certainly still valid. You should wait it out and stick to your plan. For instance, we bought shocklands at 3 tix each. Some of them are available now on the market at 2.5 or 2.75 and DGM drafts are ahead of us. But next year, we expect them to be worth at least twice that much, so we'll simply hold onto them, as we intended to do with this long-term spec anyway.
Mistake 4: Buying Late into a Spike
We'll devote an article to this next week. For now, let's just say this: When you calculate the risk involved in a spec, you must consider the difference between the actual card value and its all-time low or expected floor (the downside), and calculate its expected value or its ceiling price (the upside). If the price is increasing, the later you buy into the card, the more risks you take (more downside, less upside). Since the future is unpredictable, there is a breaking point where you have to decide against trying to profit from a spike, pass until the next one and hope for a better timing.
Mistake 5: Investing in a Market You Don’t Know
Try to know the metagame you are investing in. We studied the market and diverse formats closely before investing in earnest. Still, we have a lot to study before entering another niche, such as promos or foils. We know there is money to be made with these, but a big mistake would be to simply dive into this market without assessing its pros and cons. We had problems in the past trying to sell some foils, even while offering a decent discount. Since then, we try to stay away from this market, until we figure things out.
Mistake 6: Dismissing Your Rationale Too Easily
Someday, you will have to decide whether you should talk yourself out of a spec, based on others’ opinions. It can be good to reconsider your positions based on other players’ comments, but we realized over time that the thinking we put into a spec was better supported than some of the more spontaneous reactions we received in the forums. Several times we stopped buying after becoming convinced our reasoning was flawed in some way we hadn’t anticipated.
Even though we agreed on a perceived opportunity, we were letting doubt affect our confidence. Other traders' opinions, albeit valid and well-intended, kept us from buying into profitable targets. Our mistake was to accept these opinions without challenging them, and not defending our views with enough Vigor.
This brings us to our final point.
The Ultimate Test
The ultimate test is to come up with your own speculation targets and personalized portfolio. Buying blindly into specs discussed by others on QS will cause you many headaches. Some specs are too long-term oriented for your bankroll, or too risky because you already have dedicated a good amount of money into that sector of activity. Other specs are derived from formats you may be unfamiliar with, so selling out of them might be awkward.
Ultimately, we hope you will learn to trust your instincts. To the point of saying, "This is my call; it will not go wrong because I thought it through, and I know enough about this aspect of the market to write an article myself."