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Insider: Opportunity Cost

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Welcome back, readers and speculators!

Today's article is about the concept of opportunity cost when it comes to MTG finance. First and foremost we need to define opportunity cost, which I think Wikipedia did well:

Opportunity CostĀ is theĀ valueĀ of the best alternative forgone, in a situation in which a choice needs to be made between severalĀ mutually exclusiveĀ alternatives given limitedĀ resources.

What this means in MTG finance is that all of us players and speculators have limited resources and we have to decide the best way to utilize them. These costs are often split into two categories:

Explicit CostsĀ - Costs that involve the exchange of money. This is by far the easiest cost to define and the most obvious. If I spend $160 buying a Tropical Island, then my explicit cost is $160.

Implicit CostsĀ - Costs that occur because the resources could have been used elsewhere. Implicit costs are a tougher concept. The implicit costs of said Tropical Island purchase is that I don't have $160 to spend on the next opportunity (for example, say the next day someone wants to buylist their Mox Opals, of which I could have bought the full playset for the same amount as the Tropical Island, but I don't have $160 on me anymore).

Some other good examples of Implicit Costs include:

  1. Interest - every time you invest your money into an asset, you sacrifice the potential profit you could have made by just leaving the money in the bank and gaining interest. Currently interest rates are so low (for smaller savings) that this cost is very little and until interest rates go back up it seems like you can put your money into a lot more options and make a bigger profit.
  2. Binder/Case Space - We can only carry/display so many cards to potential customers/trade partners; because of this we have to decide which cards we want to show them. As there is a cost to not having the actual card they want available, we try to display as many cards as possible and judge which ones are most likely to be purchased (there's a reason your LGS doesn't fill their case with all the standard commons). This issue is critical to the binder grinders because it's difficult to carry large amounts of cards on you at events (and some TO's have issues with people who do) so you need to make sure to stock only the most desirable and liquid cards to allow for the maximum potential that you'll have something a potential trade partner wants.
  3. Disorganization - Organization of your stock is critical. It allows you to find product quickly and easily and there's an obvious cost to being disorganized. If you know you have something, but don't know where it is, you can easily upset customers and you come off as unprofessional--which can easily make customers choose not to return and thus you lose future profits.
  4. Depreciation - This is most often (and easily) seen with Standard staples nearing rotation. They often quickly depreciate and having stockpiles of them can really hurt your profit margin. However, this isn't strictly related to rotation. Cards can depreciate because they are reprinted, banned in a relevant format, or overshadowed by newer cards. While we can obviously plan for rotation--every writer on QS advocates unloading the Standard staples you aren't planning on using over the summer in April or May of the year while demand is still high--we often can't plan for reprinting, overshadowing, or banning. Another form of depreciation is directly related to the fact that Magic is a game. Because our assets are also game pieces they can develop wear over time, which of course affects their overall value. This is similar to depreciation of machinery seen in factories. As machines age and wear they lose value, similar to cards when they fall from NM condition to LP, and eventually SP and HP.

What Does This Mean to Me?

Opportunity cost is a cost that many people may consider inadvertently; for example, if I'm currently playing Legacy Miracles and I only own 4x Force of Will, I can't trade them unless I'm willing to give up playing that deck until I can replace them.

This is what often leads to "untradeable" cards in your collection.Ā Having these types of cards is itself an implicit cost, as you miss out on any sales or trades that could involve these cards. I bring this up because in order to maximize profits we need to reduce costs, which also means limiting your "untradeable" stock.

Some other cost reductions are obvious:

  1. Buy at a lower price. Unfortunately, there's also a cost associated with low buy prices, which is that fewer people will be willing to sell you cards. So your opportunity costs go up as your implicit cost of lost purchases/resells goes up.
  2. Buy cards with a larger accepted spread.
  3. Buy fewer cards (while not an individual cost reduction, it is an overall cost reduction).

Another option is to maximize liquidity, keeping the most amount of cash available for opportunities that come along. This focus means that you should only buy cards that are highly desirable in your area.

It also means that you might have to pass up on some good deals simply because while the price may be attractive, if you can't sell something the buy price is irrelevant.Ā This can be a difficult thing to do, but it beats having a lot of money caught up in something and watching people pass up on it over and over.

I've seen this issue in one of our local game stores. The owner picked up a solid Legacy collection (including a lot of dual lands and Onslaught fetches) but they've sat in his case for four months because nobody that plays there is really into Legacy. Despite the fact that he got it at SCG buylist he'll likely have to sell it to another store at buylist prices to recoup some cash.

We often factor in opportunity cost while trading without realizing it. When people want to trade Standard cards for Legacy cards, the owner of the Legacy cards almost always demands a premium even if at that moment in time the cards are of equal value.

The reason is because the Legacy cards are more stable and the Standard cards carry implicit depreciation costs. Standard staples also tend to have higher spreads, so if the card owners both want to "cash out" the Standard player will have to trade in a higher dollar value of cards to get the same amount of cash as the Legacy player.

I consider how much stock I have of one particular card if someone tries to trade for all my copies (if I have extra copies elsewhere I can quickly replace them should someone else want them). I also enjoy trading up like many other traders because it reduces the implicit cost of binder space and higher value cards tend to be more stable.

This method does increase your implicit cost with regards to depreciation, which might seem counterintuitive at first. If the value reduction of a reprint is typical (about a 27% reduction on average) then converting lots of cards into one card means that if that particular card is reprinted you'll likely lose more value, and you would have been better off diversifying.

For example,

Pile A

  • Card X ($40)

Pile B

  • Card Y ($5)
  • Card Z ($20)
  • Card W ($15)

If Card X and card Z get reprinted and lose 27% of their initial value,

Pile A=$29.20

Pile B= $34.6

I'm not saying to never trade up--far from it. I really like picking up higher-dollar cards with smaller ones and accepting the reprint risk. I try to mitigate this by focusing on cards that I feel have a lower chance of reprint--ones with set/plane-specific keywords, specific character names, too powerful for Standard, etc. However, I always consider the opportunity costs to trading up before doing so.

David Schumann

David started playing Magic in the days of Fifth Edition, with a hiatus between Judgment to Shards. He's been playing Commander since 2009 and Legacy since 2010.

View More By David Schumann

Posted in Finance, Free InsiderTagged

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4 thoughts on “Insider: Opportunity Cost

  1. just make sure you keep product moving. that means letting go of stuff at a loss/ break even. assuming trading isn’t part of the problem, trading more means not having to tie up your investments in one thing.

  2. Nice article, on a very crucial issue when speculating/investing on Mtg cards.

    I’ll also write something about Opportunity cost in a couple of weeks referring to my 9 months of portfolio management with MTGO.

    With some concrete examples, opportunity cost was a real thing!

    Alternatively, with other cards, I have seen what I could call opportunity benefits.

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