Welcome back, speculators!
Today's article was written to help people look at MTG speculating a bit differently than usual. I realize that many of us speculators look over cards and do some rudimentary thinking to determine if a card will go up or down in value. Often times this is enough to keep your head above water. After all the MTG market is a lot simpler than many markets.
I'm sure a few of you got that "WTF is he talking about" look on your face and immediately jumped over to our forums to see what random card has spiked in the last 2 days to start a counterpoint to that argument down in the comments.
But I don't mean that all card prices are predictable. Just that much of speculation is based on cyclical effects, which are by definition predictable.
First let's start with some relatively well known bits of information which I'll call the basics.
- 99% of preorder prices drop after a set's release. This is why we writers advocate not preordering cards. You're playing against the odds. Sure there are the occasional ones that go up (Voice of Resurgence comes to mind), but there are a lot more that follow this exact pattern.
- Rare dual lands from the old block go up as the new block rotates in. If you don't believe me, go check out the Scars fastlands right when Innistrad rotated in, and then check the Innistrad checklands right when Return to Ravnica rotated in. Even the Zendikar fetchlands (which people assumed would always be highly valuable thanks to their Onslaught brethren) were quite low before Scars of Mirrodin and gradually rose before their massive jump. There is a bit of a gap in this pattern before Zendikar as the entire Shards block only had one rare mana fixing land (Exotic Orchard).
- Cards drop in price as they near rotation.
These three facts are well known in the MTG community and yet we (as investors) often don't take enough advantage of them.
The first one is typically best utilized by stores. Pre-selling cards is a huge money maker for most stores. So much so that they tend to crack several cases to make sure they can fill all their preorders.
This is the MTG equivalent of selling short. You sell a stock (or card) for a specific price now without owning it and then buy it at a later date to cover your contract (sale). Given that 99% of the prices drop from preorder, the few that end up increasing in price don't hurt because you made money on a vast majority of the sales.
The only concern is not selling all your preorders and being stuck with a bunch of cards that are hard to move. This will become more of a challenge as more individuals (or stores) hop on the preorder train. If there's a good and relatively easy way to make a good amount of money, you can bet there are always more and more people who will jump on the bandwagon until it's no longer profitable.
The second one is why so many people reiterate the developers' cry ("real estate, real estate, real estate"). In MTG terms, this means to buy dual lands and it's for the exact same reason that developers buy land.
There is a given amount of real estate, its value is determined by how many people need/want it, and everybody needs land to live/work/play on. Thus real estate will always have a demand.
The better location, the more desirable it is. In the MTG community location is equivalent to the color combination. You can see this in the fact that the most expensive lands at any given time are the ones in the color combination of the most popular deck (more often than not blue).
It boggled my mind that for the longest time the cheapest shockland was Steam Vents, despite the fact that it's arguably the best color combination for Modern. Thus, I picked up lots of Steam Vents when they were in the $4.50-5.50 range. I did fail to account for the fact that with the exception of straight U/R decks, most tri-colored Modern decks don't run a full playset of a given shockland and thus the demand would be lower, but I still feel that over the long run they will be very profitable.
Oddly enough one of the other cheap shocklands was Watery Grave, whose cousin is the most expensive Alpha dual land by far...so I also picked up a lot of these. The expected spike has yet to occur although many of the shocklands are showing slight growth.
It doesn't help that these are reprints, which are known to be less desirable.
Last but not least we have the post-rotation drop of Standard cards. Even cards that are viable in other formats follow this pattern as the number of Standard players still outweighs the number of Modern and/or Legacy players.
Every writer on this site encourages players to begin unloading their rotating staples the spring before rotation occurs. This allows ample time for transactions to take place and many grinders will need to hold onto their cards until rotation (thus eliminating them as competition for the time being).
It makes no sense to hold onto expensive cards in your trade binder that you know will drop drastically in value, but if you need them to play then you'll have to accept the value loss when you make the decision not to unload them.
That being said, to save/gain the most money it's best to unload them before or right when they start their inevitable decline downward. It's best to trade into rare dual lands (see reason above) from the current block whenever possible or to even just sell the cards.
I am so happy that I unloaded my Falkenrath Aristocrats last spring even as the Aristocrats deck was becoming popular because I knew that they'd rotate in a few months and I didn't want to be stuck with them.
Discounted Cash Flow
Now we'll look at something a bit more advanced. The concept of discounted cash flow (or DCF) is often used by the stock market community. The main concept is very logical and nowhere near as hard to grasp as it seems when reading it over.
In layman's terms, we all have a limited amount of money from which to invest. Ideally we want to maximize our money. In order to do so we need to compare what we'd like to invest in with other potential investments to find the highest rate of return or yield.
For example, say you had $1000 to spend on investments. You could buy a ten-year US treasury bond with a current interest rate of 2.75%. This means that your expected return on your $1000 investment is $1311.65. This is calculated with the following equation. (Equation and explanation courtesy of Wikipedia.)
DPV = FV / (1 + i)n, where
- DPV is the Discounted Present Value of the Future Cash flow (FV), or FV adjusted for the delay in receipt;
- FV is the nominal value of a cash flow amount in a future period;
- i is the interest rate, which reflects the cost of tying up capital and may also allow for the risk that the payment may not be received in full;
- n is the time in years before the future cash flow occurs.
In our calculation FV is the money we expect to make. DPV is the current cost of the investment to us. The interest rate is published by the Treasury and n is the number of years we have to wait to get our money back. Looking at that you might think, hey that's not bad, I made $311.65 with basically no risk and no effort.
But what DCF does it help show you the cost of having your money tied up in that one particular investment. Let's say instead you put that $1000 into an index fund with an expected yield of 8%. In the same ten-year period you'd expect to make $2158.92 or a $1158.92 profit.
Granted your risk has gone up, some years the fund might go up by 12% while others it might be down by 7%, but if you can hold off selling you can determine how much profit is acceptable compared to the risk.
This same concept should be applied to MTG cards you want to invest in. However, in this case you're far less likely to know the interest rate (or in this case expected growth rate), but you can instead determine the expected selling price based on a likely outcome.
As my college professors would say, let's do some examples:
First one will be nice and simple. Let's look at Abrupt Decay. It's currently selling for around $6.50 (I'm rounding to the nearest quarter for simplicity). Given the strength of Jund in Modern (barring any further bannings to the deck) it seems perfectly reasonable to see this card at $10 within the next three years. So running the numbers (6.5=10/(1+i)^3) when we solve for i we get a nice interest rate of right around 16%.
How about a more challenging one. Look at the current price of Vengevine ($12 on the mid). While it was quite dominant during its time in Standard, it has fallen out of favor and the current price is mostly based on price memory. I think a price of $15 might be perfectly reasonable in three years.
Determining the interest rate shows us that should Vengevine follow our expected trajectory its rate is only about 8%. Thus while both cards would go up by around $3.00 the Abrupt Decays are a much better investment.
This simple concept is the basis for the investment strategies of some of the world's greatest investors. Warren Buffet himself is known to use DCF calculations as part of his formula for investment (though obviously it's not the only calculation).
Modern Banned List Updates
The Modern B&R update will have a major impact on the Modern format.
The unbanning of Wild Nacatl will open up the possibility for Domain Zoo (with Tribal Flames and a bunch of fetch- and shocklands), as well as Naya Zoo (big and little). Cards that may get a bump from this one:
- Ranger of Eos (gives Zoo some much needed card advantage)
- Huntmaster of the Fells // Ravager of the Fells (gives Zoo reach)
- Thrun, the Last Troll (An answer to Faeries and a solid threat at the four-drop slot)
- Thundermaw Hellkite (If Big Zoo becomes a thing this is very likely the five-drop of choice. The fact that it sweeps away most Faeries /makes it an excellent top-end finisher.)
The unbanning of Bitterblossom will open up the possibility for U/B Faeries in Modern as a true control deck to help fight the combo decks. It may also give the boost to B/W Token strategies that they needed to become competitive.
- Mistbind Clique (a four-of in old Faeries builds)
- Darkslick Shores, Secluded Glen, Sunken Ruins (these lands give U/B Faeries an almost-flawless manabase)
- Cryptic Command (Although it's already $25-plus, a shift from Jund to Faeries will increase demand for the best counterspell in Modern.)
- Scion of Oona (answers Golgari Charm and/or Zealous Persecution)
- Hero of Bladehold (This will be a strong contender if B/W Tokens takes off.)
- Fetid Heath/Isolated Chapel (the manabase for B/W Tokens)
The banning of Deathrite Shaman is a major game changer. It's a huge blow to Jund and will likely force them to cut back on Liliana's due to the inability to cast a turn two Liliana without playing a weak mana dork like Birds of Paradise. The double-black cost in Liliana will be a problem for Jund w/o Deathrite to fix mana, though the manabase itself is still perfectly strong.
The elimination of Deathrite makes graveyard-based strategies (Gifts and Scavenge) and cards (Tarmogoyf and Knight of the Reliquary) stronger. I see a lot of Jund decks morphing into Junk (mine at least), swapping Ignoble Hierarch for Deathrite, Path to Exile for Lightning Bolt, and Knight of the Reliquary for the four-drops.