Insider: Where to Begin — Part 2

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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.

Stay Liquid

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.

The Pitfalls

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 Amulet of 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."

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Sebastien Morin

Jeff and Sebastien have known each other for close to 25 years now. They have played Magic as kids, and then played Online poker for a few years. They got back into the world of Magic through the Online client. About a year ago, they decided to invest more seriously into the MTGO market. They will share their experience, the good and bad moves they made, and their strategy to successfully manage a growing bankroll.

View More By Sebastien Morin

Posted in Finance, Free Insider, Magic Card Market Theory, MTGOTagged , ,

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11 thoughts on “Insider: Where to Begin — Part 2

  1. Sympa de voir que des français participent activement sur ce site 😉
    Nice article, actually I only spec on RTR/GTC lands and boosters, I don’t play in T2 so it’s a bit hard to try something without lose.

  2. Nice article! I think I’ve made all the mistakes you’ve listed at one time or another.

    I found that staying liquid was very difficult early on in my speculative career. If I ever had a few hundred tix in my account, I would get an itchy trigger finger and want to get it invested right away. The result was that I would often I would talk myself into marginal specs. And when the inevitable strong, short term opportunity popped up, I would either miss out or have to sell out a position too early.

  3. Great piece, thanks for putting together this resource for those of us getting started.

    Do you always hold to the 5% rule? A while back I noticed you had 15% of your portfolio in RTR boosters. I assume boosters are somewhat different because they are so liquid?

  4. Great 2nd part guys!

    I super agree on the Pitfalls and found myself dealing with many of them frequently! Avoiding these pitfalls and sticking to predefined guidelines with discipline is a 99.99% (I really should say 100%) success guarantee.

    To reply to Alex, if you consider yourself a beginner, following the 5% rule should really put you away from any bankruptcy. Personally, I’m between 10 and 15%.

    Even we with the “spec of the year” lined up and a lot of Tix available I really try not to put more than 15% of my bankroll in it. Who knows? Maybe the “spec of decade” is just minutes away and I still have cash available to get in (with no more than 15% 😉 because the “spec of the century” could be right at corner!

    I really appreciate the rational associated to concrete examples you put in yours theories guys!

  5. Fantastic article. I think I will be returning to this over and over to get the info internalized. Your list of mistakes are fantastic (though sorry for your financial losses while learning them!). I particularly like you pointing out that you could have had so many more Karns for just half a tix more each!

  6. Ty for all comments

    @ Matt, we did all the mistakes listed + we are still doing some! For example, last week I spotted geist of saint traft as a good target and told Sébastien that we should buy lot of them. We tried to go on secondary market (other players) instead of buying everything from the bots. Only to save 0.5 or 0.75 tix per card. results:we could have make an easy 5 tix per card in less than one week but now we ended with only 8 copies because the market was so dry…We dont always learn from our mistake.

    @Alexander yep sometimes it’s hard to stick to the 5% rule. Especially when you have low bankroll. Now it’s easier for us because 5% means a good amount of money and means a strong position. The 5% rule is a poker theory and when you go deeper into math calculation, it is just the right amount to avoid bankruptcy and to be able to absorb variation. It will help you in lot of ways to stick to it. Now if you have 7-8% dont panic. Its ok. I think 15% is too much because 2-3 bad moves and it might cripple your bankroll a lot. I guess the more experience you have, the more you can judge by yourself the proper %. But I saw lot of guys going on tilt in poker after playing too high for their bankroll…Blowing in one night 3 years of good poker. Maybe trading is a bit different, but when things turn bad and you have put so much time trading, you might do something stupid just to catch all the money back. Believe me it,s the worst thing you can do and you never know how you will react until it happens. I have been through this process way too many times. Now I try to stick to it. As for the boosters part, yeah, I dont consider boosteers the same way because it,s so easy to sell them and its always a sure shot when you know the structure of the drafts. Not like individual cards where the meta shifting is way too important.

    just a little mathematic fact here: A=1,B=2,C=3,D=4….Z=26

    Discipline=4+9+19+3+9+16+12+9+14+5 =100%

    Thats right, if you want to have a perfect note, the key is DISCIPLINE

    ty for your time guys and remember to come talk with us on MTGO or in the forum my name is altaran2

  7. I might add that the RTR and GTC boosters are more or less considered loose tickets, rather than a position in our portfolio. But, more specifically, it is only valid with RTR and GTC boosters for now (more true for GTC at their current prices). This investment is very context specific. The reasoning didn’t apply to ISD-DKA-AVR because of the different drafting and prize structures, and it is too early now to figure out how the next block prize structure will be configured. So maybe the way we invested our floating tickets was a unique opportunity, instead of a reccurring pattern, only time will tell. We will assuredly repeat this profitable process in the future is the rationale supports it.

    To Alexander, I would love to add another concrete example with last fall (or was it this winter?). Jeff and I had read on SCG and on QS (ty Doug) that there was a lot of heat for Olivia Voldaren. Back then, I confirmed to Jeff that the mtgo secondary market was being bought out of Olivias and they were nowhere to be found. We felt strongly about the card and went to the major bots to buy our copies. We decided to stick to the 5% rule because we could have misread the market, and because it would have locked most of our remaining money to that target. Also, people on Qs were not all agreeing on that spec, which helped us stay cool. 3 days later, we were flippinig our copies for 90-100% profits. We first thought: “We knew it, we should have gone for more”. But rapidly we remembered that 1) we respected our rules, 2) managed risk properly, 3) kept some tickets for future targets, 4) we have been confident with other targets before that didn’t make any money, so we never know… So, the “we should have gone deeper” is flawed in many ways. Instead of thinking about the “lost” tix (if we had bought up to 10-15% of our bankroll), we immediately talked to each other making sure we were reinforcing our good behaviours (discipline, bankroll and risk management, right read of the market, right read of the meta). It makes all the difference in the world.

  8. Great articule!

    So acording to the 5% Rule it would almost never be a good Idea to invest in power 9 in Real cards?

    I just got a Library of alexandria for $150 and am worried it was a bad call.

    are shock lands ever liquid enough to count on? or are they still to risky.

    should treat my online portfolio and Real life magic investments together or separate?

    insted of putting $1,000 into Modo ive put 1,000 into physical cards and $500 into modo.

    was that a bad Idea? I just figured I knew the phiscal market better.

  9. Spontaneously, I will answer this:

    Invest in the market you know best. I think paper shocks are pretty liquid,and also a good longer-term hold.

    In real life, parameters are different. In my mtgo account, I know precisely how many tix are available, how many tix were invested to start with, etc. In real life, I make money every week, I buy cards from online stores and ebay and I lost track of how much money I injected into this. So the 5% rule is very difficult to apply when there is no precise number to determine your real entry cost into this market. If for sure, you are determined to stick to the 1000$ investment in paper, then investing on a single card worth 150$ is committing 15% of your portfolio. The Return on Investment (coming soon, with Jeff’s maths to support it) might not be very high. Depending on your outs, Library might be harder to move than 150$ worth of shocklands.

    Moreover, let’s just analyse quickly your comment: You bought a card, and now the investment is large enough that you are getting worried. Being worried will make you doubt, and could potentially lead you to bad decisions (either keep the card for too long, or get rid of it too early). If you feel uncomfortable with your investment, take note of that, and reajust for future buys, both for paper or online cards.

    The 5% rule should be understood as a diversification rule, to avoid a crash in one part of the market whre you have put most of your money, crippling your bankroll to an unrecoverable level. With 500$ online, 5% means 25$ per target. It also means you should have 100-125 tix available for very short term flips, and invest the rest across formats you know well, and towards decks you are familiar with too.

    I hope some better paper traders will jump in, so they can provide you with recommendations for your Library. Or ask on the forums for tips!

  10. Also, invest in shock lands isn’t concerned by 5% rule I think.
    Without reading in the future, I can say my GTC lands which I buy 2.5/3 will increase after the release of the new block (4/6 tixs).

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