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Insider: MTG Investing and Discounted Cash Flow

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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.

The Basics

First let's start with some relatively well known bits of information which I'll call the basics.

  1. 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.
  2. 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).
  3. 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.

Filling Preorders

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.

Real Estate

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.

Rotation

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.

Sometimes the cards don't drop much (see Liliana of the Veil), other times they plummet (see Bonfire of the Damned).

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.

Wild Nacatl

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:

Bitterblossom

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.

Deathrite Shaman

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 Noble Hierarch for Deathrite, Path to Exile for Lightning Bolt, and Knight of the Reliquary for the four-drops.

17 thoughts on “Insider: MTG Investing and Discounted Cash Flow

  1. Very informative. I enjoy the math lesson. I also appreciate the heads up on the spring sell off.

    I also aprove of the Real Estate stratagy. Rare lands always seem to set the bar for a 5,10, or 20$ card. When you have a land soemone want, They are willing to trade anything for it.

    Turns out you need mana to cast spells, and lands are a good way to make mana.

  2. Great article – just some nitpicks with the Faerie comments:

    Scion doesn’t really protect against Golgari Charm or Zealous Persecution unless you happen to have two of them out, right?

    And I’m not sure Thrun is a real “answer” to faeries, since they’ll just block with a BB token and then Champion it to Mistbind Clique or something. Same thing with Great Sable Stag – never really did anything against faeries (iirc).

    Faeries banes are MonoRed and Merfolk (usually because of islandwalk), but now that Nacatl’s back in the picture, Zoo may have pretty good game against them as well.

    1. You bring up a very valid point bout Scion of Oona. I should have been more specific. Without Scion(s) Faeries is VERY weak to those 2 cards as 2 mana “sweepers” save off Mistbind..in fact their biggest downfall may in fact be that they only cost 2 mana (and thus can be countered with Spell Snare and Spellstutter), but still the necessity to have 2 in play (as Scion doesn’t give itself the +1/+1) is actually pretty huge and may very well be why Scion hasn’t really shot up like Mistbind Clique did. Monored might be a good choice as well…especially since Deathrite is gone to exile those Hellspark Elementals from the yard and gain life. I do agree that Thrun isn’t a perfect answer to Faeries…as he’d need Trample to really be effective.

  3. Wow not a fan of vengevine as a spec huh? I think the card has a lot going for it, it was 20 bucks a year ago, can potentially be very powerful, mythic, at an all time low, the best hate card in the game against it just got banned. I don’t look at it as a 3 year spec, very few cards I do because withbl reprints, new cards, bannings there’s almost no telling what’s going to happen to most cards in that kind of time. But if it puts up good results in modern events soon it could easily go back up to 20 sometime this year.

  4. While I can appreciate trying to apply real financial principals to magic speculation, I believe your elementary understanding of these concepts does the community a disservice.

    For example – DCF is not used to determine the future value of an investment given a rate of return. It is used to evaluate a series of cash flows that take place in the future. You discount these cash flows by a rate (typically your cost of capital) to find the present value of this series of cash flows. You’ll notice in your example, there was no discounting done, and there is no cash flow assumed.

    You have essentially used a complex present value function to determine an annualized return based on some arbitrary future value you pulled out of thin air.

    1. You are correct in that the DCF function (and I am definitely no expert) may not have been the best one to use, especially since there is no actual cash flow. However, the equation (to my understanding) is still a good way to compare Rates of Return in order to maximize your potential future profits. I did have to pull future values out of thin air because there is currently no way to determine future values of MTG cards definitively (if there was none of us would be speculatingm, we also lack a lot of the other knowledge that can be attained in regards to companies including investment capital, current leadership, debt, etc.), however, I do feel that based on card power level, castability, mana cost, usefulness, and archetypes used in that my price guesstimates will likely prove relatively accurate (though I admit that thanks to the every changing world of MTG and Wizards constantly adding new cards to the mix that things can change drastically with a single spoiler). However, that doesn’t change the fact that when you have a limited pool of investment capital you should focus on maximizing your Rate of Return. Given I don’t work in the world of finance/accounting though I would greatly appreciate any concepts/ideas regarding finance/accounting functions that you believe I should apply towards future articles.

    1. That’s honestly because I don’t like River of Tears on this one. It’s conditional mana fixing, as opposed to gauranteed mana fixing provided by the other 3. If you consider the fact that Faeries would already be running several watery graves, some # of blue fetches, these lands, and likely some basics you quickly run out of room to include “weaker” mana fixing.

      1. Hello! I’m very new to this site. This is my first post.I bought in about 18x of these River of Tears on MTGO at .94~ each. They are roughly 3.1-3.2 on buy bots as I’m writing this. Do you think I should just take the flip and be happy or might they keep raising?

        1. I am brand new myself, but the first concept I picked up here was “Sell into the hype.” You have a chance to triple your money right now, would you rather risk that for a potential more, or have to worry about selling fast into the backslide? You can take that cash and immediately invest it into something else…

            1. Clark’s right on this one. I put my Mistbind Cliques up on ebay the day they skyrocketed (still haven’t sold) but you want to always sell into the hype. They may go up a bit more, but River of Tears will likely not find it’s way into Faeries due to it’s conditional mana fixing. The key thing to remember in most older formats…if players have several excellent options and 1 good option…then the good option doesn’t stand a chance.

  5. I am less of a speculator than a collector/player looking to limit the damage to my wallet by picking cards up at the right time, buying/flipping collections, and generally trying to mitigate risk/reward of playing for fun versus increasing my bank supply so that one day I can afford my own set of Power Nine.

    That being said, my history has been to pick up aobut 3 boxes each release and play limited at the kitchen table with a couple close friends until the next set comes out. This means that I can gather the majority of a set, often send in my extras for store credit, and use that to fill the gaps in what I missed.

    As you mentioned the cost of presale, I have often wondered if I would be better served to open my packs early, and buylist cards while the hype is up. I have certainly watched most numbers drop over the months until the next and wondered if I would have mitigated costs better by just shippping out my rares and essentially playing “repack” drafts.

    Thoughts? (or generally what I could be doing to increase my savings toward my goals?)

      1. The problem with that is that it often takes the stores a bit of time to update their buylists to include the latest set. In that time the cards are already dropping in value some. So that leaves you with a few options;
        1.) Crack all the packs at the very beginning and try and sell them as quick as you can.
        2.) Crack all the packs at the beginning and trade into other more stable cards (as there are plenty of people who just want their playsets to play ASAP and they are great to trade brand new stuff to because they often don’t care that the value will likely drop).
        3.) Continue doing what you’re doing (especially if you enjoy limited).

        If you’re main goal is to enjoy the game and you do that by playing limited with your friends at your kitchen table, well I don’t know how to assign a $ value to that. My concern would be that if you take option 1 or 2 you won’t have option 3 available…and if you crack all your packs you’ll likely get a few good cards and a lot of chaffe that is difficult to trade. If you’re not very comfortable trading or selling quickly then I fear you’ll sacrifice your limited with friends and not be all that much better off. I personally ordered 1 box of BoG and I played in 2x Pre-release events…mainly to support my LGS. The only cards I want out of the entire set are; 1x of all the Gods for EDH (I got 2 via Pre-release), 4x Spirit of the Labyrinth (for legacy/modern), 1x Kiora (for EDH). It would have been cheaper to just buy the cards I wanted, but it’s important to support your LGS because without them most of us wouldn’t have a place to play (though it sounds like you’re good either way).

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