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Insider: Opportunity Cost and Diversification

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One of the things I think is important to remember about writing for a site like Quiet Speculation (and really, anywhere) is that you’re reaching a new audience every time you write an article.

The group of you reading this article right now is not 100 percent the same group that read it last week. Or last month. Or when I wrote my first column three years ago.

So from time to time I think it’s important to address topics that we often gloss over. Not everyone is advanced in their understanding of MTGFinance or a pro at this. Many people are just beginning to build a bankroll or an investment “portfolio,” as it were, and there’s no harm in even practiced pros going back and evaluating some concepts that we take for granted.

Today, I want to talk about opportunity cost.

What It Is

Opportunity cost is defined as the “loss of potential gain from other alternatives,” when dealing with multiple options.

Simply put, opportunity cost is what you have to give up in order to get something else. Every time you put your money into one asset, or Magic card, you’re incurring a “cost” by not enjoying any potential benefits of that money being elsewhere. For instance, investing in a traditional CD with a guaranteed three percent return instead of a slightly riskier stock that yields eight percent, that five percent is the “cost” you paid by putting your money in the for-sure bet.

In Magic finance, this is extremely important, especially as you’re starting out. If you have $100 to invest, you can only put that money in so many places. If you buy ten Deathrite Shamans with that cash, that means you’re completely unable to take part in any other spec that comes up in that time.

Another example is something like shocklands. Given the print runs and historical data, and extrapolating from that, it’s almost a sure thing that these will be more expensive in five years than they are now (I’m aware this isn’t 100 percent, but for the purpose of this example work with me). So if you take your $100 and put it into shocklands and come back in five years, you’re almost certain to have made money.

But that means that $100 didn’t go into anything else. It didn’t go into the Boros Reckoners that you caught ahead of the Pro Tour, and it didn’t go into the Scapeshifts you bought the moment after the card was unbanned.

Let’s say five years down the road you’ve turned your $100 into $300. That’s great. But if you had that money available to invest in other things along the way, it would have turned into $500. That’s the “cost” associated with any spec.

Why it Matters

As you can see from the example, it’s an important concept to understand. It’s why I get annoyed when I see these “I have $100 to invest, TELL ME WHERE TO MAKE MONEY” posts on Reddit and the like. There are so many things they don’t take into account, such as the time period, risk tolerance, etc. Opportunity cost is also ignored here.

I do understand that everyone has their own budget for speculation, and we all play in different markets. Some readers maybe want to speculate on San Diego Comic Con Planeswalkers (and that worked out), while some of us are still just trying to accumulate a playset of shocklands to speculate on. For some people, “speculating” means trading for an extra playset of a card, while for others it means buying hundreds of copies.

We’re all operating at our own levels, but everyone deals with opportunity cost just the same.

Considering Opportunity Cost When Investing

One of the things we often talk about speculating on is sealed product. We all know about Sigmund’s mess of Innistrad boxes, and I have a fair amount of sealed product as well. At the moment, that means one of each Commander 2013 deck, two boxes of Modern Masters, a box of Dragon’s Maze, and a From the Vaults: Twenty.

I’ve seen a bunch of opinions regarding whether or not these are good investments. When I asked on Twitter if I should bust the Grixis deck for True-Name Nemesis or keep it sealed for the longer-term hold, opinions were mixed. Keeping it sealed will almost certainly yield a solid return a year or two down the road, but opening it now to flip for cash could turn out to be the best play.

I also have several hundred Zendikar basic lands. These are going for about 75 cents to a dollar apiece on eBay right now, up from something like 50 cents a year ago. That’s a great percentage return, but in terms of actual dollars it’s not very impressive. Unhinged lands are all under $7-8 right now, and it’s been quite a long time since they were released. Surely that money could have been better spent elsewhere, but is doing so necessarily the right move?

That comes down to your personal strategy, and how much risk you’re willing to tolerate. Sure, speculating on Standard cards could yield a much higher return, but it could also flame out entirely. Some people don’t want to follow the day-to-day of Magic, and would rather just stock something in their closet. It’s why people invest in things like mutual funds or CDs in the “real” world. Sometimes you just want something to make you money without any additional effort.

Forming Your Own Plan

Here’s the thing. I’m not here to tell you whether you want to take the low-risk, low-return or the riskier but potentially more rewarding play. It’s your decision.

But the best piece of advice I do have is this: Don’t put all your eggs in one basket.

This is where talk of “diversification” comes in. Of course, true diversification means putting your money in investments that aren’t Magic at all (and I do advocate for that), but we also want to diversify within Magic.

So if you have $100 to invest, don’t ask me where you should put it, because there’s no singular answer. Some of that would definitely go into Modern staples or Standard spec targets or long-term holds. It’s whatever best fits your strategy.

Personally, I’m not worried about whether the sealed product I have is getting me the best possible return, because it’s doing exactly what I want it to do. I’ve managed by Magic budget so that the money I have tied up in that product isn’t preventing me from investing in the next spec that comes along. But whatever happens with those other speculations, I know I have a closet full of assets that are slowly appreciating.

What diversifying like this does is mitigate our opportunity cost. That money that I spent on the sealed product isn’t precluding me from taking other positions.

I’ve been in the finance game for awhile, and while I would say I don’t have even half of my Magic money tied up in this sealed product, the low-risk, slow-gainer is part of my “investment plan.” If you’re just getting started and have a limited budget, this may not be where you want to put your money. When I started doing this I didn’t really dabble in sealed product at all; I wanted to get in on the next spec and take the profits and apply it to the next spec.

But as I went along, I stopped reinvesting 100 percent of my bankroll into the next spec. I began to “bank” some of these profits by converting it into stuff like dual lands or sealed product. Now, I don’t have to sweat a busted spec like Master of the Pearl Trident. When something doesn’t work out, it sucks but it’s not crippling to my overall strategy, and that principle remains the same if you have $100 or $100,000 to invest, so long as you diversify.

So what’s right for you? Only you can answer that question. But I want to impress upon you that you shouldn’t be afraid to invest in something like sealed product just because it isn’t seen as the “optimal” play. Opportunity cost is something you must consider, but it doesn’t mean you always have to chase max profits; it’s okay to take the “sure thing,” even if it’s less exciting.

 

Thanks for reading,

Corbin Hosler

@Chosler88 on Twitter

14 thoughts on “Insider: Opportunity Cost and Diversification

  1. Great article, Corbin! I am a huge fan of these general investing articles and opportunity cost is such a major consideration.

    As for my INN boxes, I am experiencing some disappointment from this investment. I still think I can profit on these in time, but as you know I also invest money in the stock market. The stock market has returned like 23% YTD while my INN boxes are actually down about 10% from where I bought. I should have put more of my money into the stock market, then sold those stocks to buy INN boxes nowish. Opportunity cost came back to bite me here.

    But moving forward I would rather be in INN boxes methinks. Diversification is also a thing, and I do consider MTG a diversified aspect of my full portfolio, including “RL Investments”.

    1. Also a little wary of the stock market right now. Lots of downward pressure in the next several months/years as the Fed tapers and the economy limps along.

      1. I mainly exercise the mindset: be fearful when others are greedy and greedy when others are fearful. As the market breaks new records, this is a time to be fearful. I’m trimming my RL investment positions to take some profits off the table.

        But the “leave 10% on the table for the next guy” doesn’t work in stocks. Depending on the time horizon, 10% can be a spectacular return. But I do try to sell on the way up and buy on the way down, which in essence does mean I leave some profits for someone else. Just not all of them.

  2. Great article Corbin. It’s always important to remember that we have people of varying experience when it comes to MTG Finance and sometimes it’s good to get back to the basics.

  3. This article is great! Touching on economic theories and then backing it with solid examples is so invaluable. Articles like this one are part of the reason this site is so useful, and so different from other mtg finance websites.

  4. Hey Corbin,

    Great article. I have maybe 1 year of spec experience so I don’t consider myself an expert, but I have seen some things.

    Last year, I was really into diversification and wanted to play it safe, so I invested in a whole slew of things Qspec recommended – aetherlings, Dspheres, obzedats, blood barons, and a few jaces etc all good solid staples with cash. In hindsight, I think the best standard spec with the best ROI was probably Jace when it hit ~$10, and when standard spiked for theros, it went up to 30+, yielding $20 buylist prices.

    So now, realizing there is a “best play,” and looking at strong performance indicators (Jace was a star in Dragon’s Maze PT Block), I think now there is a correct spec with the highest ROI where you ignore the opportunity cost of investing in other lower ROI cards (not to say you wouldn’t trade for them), at least from a cash perspective. I’m not saying that I personally don’t diversify as I do, but I think with more experience, you gain more insight and certainty and should move more heavily on certain specs.

    Thoughts?

    1. You’re right that there’s always an optimal play, but we don’t always know what it is. Sure, Jace looked like a sure thing, and that obviously worked out, but there have been years past where it didn’t go that way. Lingering Souls and (whatever that enchantment was), for instance, didn’t pan out at all.
      As I’ve talked about before, I rarely buy in cash, mostly out of a conservative mindset. I can get plenty of cards in trade throughout the year (and from buying for the store), so I approach it from a slightly different perspective.

  5. Corbin,

    Excellent article! I couldn’t agree more with the comment about the “HELP ME MAKE MOAR MONEY!!!” posts on Reddit and elsewhere. The fact that people in the actual finance community get downvoted as hard as they do when they suggest things like patience, diversification (not just between MTG cards, but also “real world” investments), selling into hype, and maintaining liquid assets speaks to the lack of people with actual finance backgrounds in that community. Everyone who ever won an FNM thinks their opinion matters…

    I think for the community to really move forward these kinds of articles are incredibly important. In some ways it’s a shame that they’re behind the pay wall, but the quality of the articles are also a solid reason to throw down the cash for a membership. Keep it coming!

    – Andrew

  6. This was a well written article. Possible improvement would have been to show the performance of some of your other investments and their returns vs cards that you did not invest in.

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