Insider: Constructing a Magic Mutual Fund

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Here I endeavorĀ to describe the ideal MtGĀ Mutual Fund. I consider mutual funds to be a poor investment when they consist of Ā too many individualĀ stocks. Ā This means an increase in transaction costs and tax liabilities as positions are added and subtracted. Add to that a diminishing benefit to diversification and at some point (around 20 stocks*) it becomes very hard to justify having added value to a portfolio with the addition of a new position.

Financial advisers often tout diversification without explaining that market risk is not proportionally reduced as positions are added. They make money when they set your money in motion and buying funds of funds, or at least a fund consisting of hundreds of individual positions does a good job of bringing home revenue. Further more it mitigates THEIR risk. They will likely meet or slightly underperform the market and as they are just putting you in the care of another manager they can absolve themselves of much responsibility. My rule of thumb is that the more they pound the table for diversification the more likely they are pleading ignorance: "Ā wide diversification is only required when investors do not understand what they are doing"- Warren Buffett

So why am I making an MtG Mutual Fund? Because I have positive expectations and knowledge. I know what cards are being played and in what formats. I also expect to be right about the future price of those cards more than half of the time; simple facts that put me in the enviable position of wanting to bet often. Earning just 1% on my purchases and reinvesting the gains will meanĀ 69.3 transactions to double my investment. Its a lot easier to sell 69 cheeseburgers than it is to sell 69 steaks, so even if I only manage a paltry 1% ROI, I will make up for that with volume. Hence I'm looking for cheap cards that see tons of play (assuming play will help me maintain necessary volume) and will be creating a nano capĀ mutual fund.

Another reason to hedge Magic investments in a mutual fund-like fashion is to acknowledge some inherent risk in the market. Acquiring cards for profit is a gamble and should be treated as one. Although I do expect to win more than I lose, making more bets with the same amount of dollars mitigates my chances for total loss. Take the famous example that follows two simple rules: 1) at all times the players bet 1% of their bankroll, rounded down to the nearest dollar, 2) unless a winning bet would put the player over $1,000,000 then they bet as much as needed to get that $1,000,000.

$100 Bankroll, 1% Advantage

  • Bets won = 7,182,811,698 (50.4999%)
  • Bets lost = 7,040,599,544 (49.5001%)
  • Player achieved $1,000,000 first = 79,438 (83.019%)
  • Player went bust first = 16,249 (16.981%)
  • Average number of bets to reach $1,000,000 = 174,972 (364.5 days at 8 hours per day, 60 bets per hour)

That example is used to disprove the claims of betting systems by expressing how even the slightest advantage can, over time, lead to serious returns.

Applying the Theory

Our MtG Nano Cap Mutual Fund takes the traditional pitfalls of mutual funds and turns them on their head. Increasing transactions help us press our slight advantage to greater returns and additional cards (replacing stocks here) added give us the means though which to place another bet on ourselves.

To copy the above $100 bankroll, we'll need to find a hundred one dollar bets. That's a tricky proposition, so I'll consider cards up to 5% of that bankroll - getting me to at least 20 positions or bets. Maybe now, then, is the time for some actual picks?

Making the Picks

Copies of the Modern Masters foil Empty the Warrens can be had for around $2 shipped. With new art, adding 2 foil copies along side a regular version looks like a decent play considering uglier Time Spiral foils command a $6 price tag. Ebay has MM pricing above the TCG $2 ask.

Gitaxian Probe foils are an option, as single New Phyrexia copies are available for under $5. I actually prefer regular copies, as buying one on TCG is hard at less than $1 but getting five for $3.50 is possible.

Delver of Secrets // Delver of Secrets is good enough for every format, and you can add eight copies for just $4.16.

Six copies of Tragic Slip for $4.67 looks less exciting but is probably good enough to merit a spot.

Modern Masters also gave Grapeshot a facelift and with MM foils available for around $2.50 shipped, you are looking at a greater than 50% discount to similar Time Spiral versions. A nice addition to the fund.

Along similar lines, both Manamorphose and Trygon Predator have new art in MM. The Predator isn't available for less than $5 shipped but its $6.47 price tag is 40% the cost of played Dissension foils.

Two Manamorphose foils from Modern Masters would run $9.69, or ninety-nine cents more than a single foil copy from Shadowmoor. Seems like a good pick, even at two times the exposure.

$4.44 buys one NM copy of City of Brass MM edition. Again, a play on new art that has little downside. Other versions in the same condition all fetch at least $4.06.

Knight of the Reliquary for $4.89 (MM) or $4.99 (Conflux). Pick one and you've got a card playable in Legacy and Modern with EDH appeal.

Another card that receives double weighting to get cost per under $5: Hinterland Harbor. With two copies available for $9.97, and no dual lands in M14, this Innistrad G/U fixer has some legs.

Entreat the Angels for $5.35 looks like another solid pick up, but here is a card that will likely drop enough during rotation to merit waiting. I love this card at $3.50 and think adding it to a watch list makes sense.

Going slightly underweight and picking up two copies of Sire of Insanity for $2.49 gives exposure to a very powerful 6-drop that should pick up momentum when we roll into Theros.

Armada Wurm sure is an ugly card, but a sub $3 mythic that puts 10 power on the board is worthy of an underweight position.

Supreme Verdict is another Return to Ravnica gem and adding THE uncounterable sweeper for $4.40Ā seems like a no-brainer.

Gatecrash offers a planeswallker for less than $4.20. Gideon, Champion of Justice looks more playable than Vraska the Unseen but is about $2.50 cheaper...

I'm not sure how playable Duskmantle Seer will ever be in Standard, but picking up 2 copies for $5 is probably cheap enough for a bit of a gamble considering Seer's mythic status.

Loxodon Smiter is an efficient beater available for just $3.93 shipped. Playing well versus Sire of Insanity suggests in could continue to have some legs in Standard.

Dreadbore is $3.15 and that makes it worth a look. Removal at sorcery speed isn't great, but removing a Planeswalker for 2cc has to be worth $4, no?

Adding it All Up

Buying that list would be close to $100, and making up the difference is as easy as finding a deal on Boros Charms. Because we're after turnover and our threshold for gains is so low, trading will be a very valuable tool in increasing the value of the fund. Trading off the Duskmantle Seers for $6 of value will be easier than selling them for the same price but it still would represent a 20% ROI.

Notice screening for price (as dictated by % of bankroll) and understanding volume will be more important than transaction cost means we can add playable commons, cheap mythics, niche uncommons and more without worrying too much about any individual pick. An interesting side effect to maintaining this kind of portfolio is being the only person in the room with Tragic Slips when the local shop has sold out. Not a bad place to be!


16 thoughts on “Insider: Constructing a Magic Mutual Fund

  1. This is really a neat idea. If successful, will you increase the bankroll and allow people to “invest” in your mutual fund? If you provide a detailed prospectus (as you kind of did above), I’d be willing to throw $100 at a Magic Mutual Fund to get some exposure to MTGO without having to actually do any work. Naturally you’d be entitled to a small fee :).

    1. I was actually wondering the same thing…sounds like a very cool idea. At $100 worth of card it wouldn’t be too difficult to unload, I do see potential issues if you don’t own a shop with doing larger amounts (like $1000 “funds”)..but I love the idea. The only other problem I see is that given Matt is the only “investor” this seems less like a fund and more like a $100 worth of speculation choices (many of which I agree with…except Tragic Slip…given it rotates in 3 months and it’s a common that doesn’t really see any eternal play)

      1. i don’t think grinding 1000$+ is an issue. you can add new positions so you aren’t holding 20 positions @1000$ but 100, or something in between.

        selling isn’t as tricky as maintaining churn because 1% return rate per position isn’t that big of a threshold making buy-listing an option.

        @Sig- IF successful? IF!?! i have no intention of managing other peoples money. that puts fear into me. i prefer to lose and win alone, but i encourage anyone to put together a list of cards worth 100$ including at least 20 different cards. you don’t have to shell out cash to get started and you can start with any amount – just maintain the max 5% of bankroll per position rule to clue you when to sell/ add a position.

        i might put one of these together in a binder and grind out from that binder but i am not going to get near the volume required ’cause i am not a store (people don’t come to my house every day looking to trade/buy). i will like making a binder like this and have no problem keeping people updates. so i’ll try and make a series of it.

  2. One thing I don’t understand here is that we’re talking about grinding a 1% edge but the bid-ask spread on these cards is say 35%. It would be interesting if someone did an article series on this with periodic updates, but I would like to see cards only outed by buy list, so you are going to begin with a realistic loss. Closing positions by trades isn’t replicable.

    1. Jason, 1% is just the minimum gain required. i do expect it to be much easier than that to increase virtual worth (trades) and real retuns (sales); i expect a better than 1% roi in other words. the hardest part isn’t getting 1% or better roi, its getting transactions done.

  3. What if you did something similar but on a larger scale – say 1000 dollars. What would you get for your portfolio then? MtG REIT- Add more real estate- shocks, fetches , duals etc. seems good. Others?

    1. if you started with 1000$ it would be easier in theory because 1% is 10 bucks, so yeah- suddenly you can include shocks and a whole lot of other cards without double weighting too many.

      the thing to keep in mind is maintaining enough positions to hedge risk (although things like everyone quits MtG are not hedge-able you CAN hedge banning, rotation imo) and making sure you don’t allow a single position to = more than 5% of total bankroll. the 5% is a bit arbitrary, but again designed to keep you diversified and churning so you can get the volume needed to accept lower overall ROI.

  4. I’m at work right now so I’m blocked from sites like mtgstocks and blacklotusproject, but do those sites provide the historical prices of cards in text format? If so, we could actually apply some portfolio theory and create an efficient frontier of magic card portfolios. If we assume that the historical return of say non-blue dual lands is the risk-free rate, we could draw the capital market line and pick out what the market portfolio should be — essentially creating our own S&P500 for magic cards, call it the QS500?

  5. Looking back at the article and what I put, 500 assets would not be a reasonable amount for most people, but I think 50 would be. It would be real sweet to see what the QS50 portfolio should be and then we could use our collective knowledge to apply some speculative valuation to increase/decrease its current return which in turn would alter the holdings of each card. I.e., if we used letter grades and Dark Confidant was in the portfolio he would get an ‘A’ rating leading up to modern season and something that was about to rotate and lose considerable value would be a ‘D’ or ‘F’. The net effect would be that the number of Bobs in our portfolio would go up.

    1. thanks for your comments. i am trying to sleep before prerelease but these good ideas are running around my head.

      grades should probably include growth prospects.

      side note: hard article to write, glad people enjoying. goodnight and GL to all prerelease participants tonight.

  6. yea this was a great article. Id be interested in hearing your thoughts on doing this through online sales (where shipping + fees complicates things and thusly demand higher than 1% right?). I could be missing something Im very new to more hardcore financial side of all this.

  7. I’m definitely up for competing funds. If we are going to do a fantasy baseball league of sorts, I think we should limit it to 50 as mentioned. The biggest question in my mind is, **where can I find historical price data in a format that I can load into excel?*

    1. @Sean ask in the forums. unlike traditional stocks, its quite easy to get a price outside of a historical trading range. for example: promo scavenging ooze sold for 5$ at m14 prerelease by some guy.

      just using trading tools, you could set up a portfolio and check on its value weekly, updating total value/ making and documenting changes someplace else wouldn’t be too hard.

      i am probably just going to put together a binder of stuff (not worried too much about total value, just maintaining the % per card rule) and go from there. if this happens in an efficient and sensible manner i might make it an article and dedicate future articles to changes, exp.

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