Here I endeavor to describe the ideal MtG Mutual Fund. I consider mutual funds to be a poor investment when they consist of too many individual stocks. 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: " 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 mean 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 cap 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.
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.
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.
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!