Insider: Making Money by Being Wrong – MTGO Penny Stock Picks

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I've said as much in other articles but I'll reiterate here--you can't predict the future. Even professional investors fail to do so on any consistent basis; the classic experiments that pit pro stock traders against random decisions demonstrate this quite readily.

So if the millionaires on Wall Street can't predict the future, how could you possibly expect to do so?

It all started with Ezuri, Renegade Leader. I bought about 100 of them, many many years ago, under the assumption they were "cheap" and "should be good some day." Boy, was I ever wrong (or so I had thought for those many years).

For years they languished on my account, forgotten to time and tale. But one day I saw something that shocked me; Ezuri had spiked hard as a result of an Elves deck performing well in Modern.

Suddenly, my $1 worth of junk rares was worth close to $100. I hadn't been that excited since I bought a Bazaar of Baghdad with Bitcoins!

Turning trash into treasure felt amazing, and it rekindled my interest in Magic Online. When I realized that a dollar spent three or four years ago had basically kick-started my MTGO account again, I was hooked. What looked like a failure (albeit a really cheap one) for years had turned into a comparatively huge payout overnight.

Plenty of junk in my MTGO trunk.
Plenty of junk in my MTGO trunk.

Getting Beyond "Right" and "Wrong"

There are plenty of other bulk rares I hold on the account, which are still sitting around gathering digital dust. If you looked at the number of cards purchased compared to the number of cards sold for a profit, you'd say I was "wrong."

Let's say I bought 100 copies of 20 different cards. Considering only 100 of those ended up profitable, you'd say I was 95% wrong. I'll take 95% wrong all day, and I'll explain why in a moment.

You don't need to predict the future to make some money and keep Magic affordable. You just need to be right sometimes.

The key here is that "predicting the future" is too specific. If I say, "Card X will be worth $Y more in Z months," I am either right or wrong. That's called a binary outcome. It's either A or B, 1 or 0.

The issue with a binary outcome is that you don't get bonus points for being correct about the precise magnitude of change. Nor are you getting any extra credit for being spot-on with the timing. The framework above is far too rigid. You want to be able to profit from any positive change, not exactly $Y. You want to be able to say "eventually" rather than "in three months."

The real issue is that you have no actual idea which direction the price will move, let alone the magnitude. Trying to pin down the vector (up or down) and the velocity (by how much) is a losing proposition when you try to do it with a single card. There are too many variables at work for anything more than a loosely-educated guess about the outcome.

If you're right, you're lucky. If you're wrong, you're unlucky. And last I checked, Magic is not a game of pure luck; neither playing nor trading should be considered as such a game, especially when money's on the line.

Buying a Basket

The upshot of all this is we want to avoid individual stock picks, because they amount to nothing more than gambling.

Since this particular article is focused on MTGO, I will leave paper cards out of the discussion. The economics at work don't apply offline in quite the same way (though some of the core concepts are certainly applicable).

We want to embrace the fickle nature of the MTGO market, not fight against it. We can do this by buying a large batch of similar cards at once, something our other analysts have called a "basket." The idea is that you're not certain which assets in your basket will gain or lose, but you believe that some of them will gain enough to cover the whole portfolio. I'll elaborate on this shortly.

Lately there have been a few awesome Insider articles talking about using redeemable full sets to assemble a basket and deploy large amounts of capital in a few small transactions. This is a similar concept, but it requires significant capital; redeemable sets can cost anywhere between 50 and 150 tix, so getting broad exposure on a budget can be difficult.

My primary investments in Magic are on paper, but since I started living a life of full-time travel, I decided to make MTGO a secondary project. It's appealing due to the ease of transactions and lack of physical inventory.

I decided to use the 100 tix I got from cashing out my Ezuri position to kick-start a new project. With my strategy, 100 tix was a lot of capital, so it gave me ample time and space to test many hypotheses.

The Method

In a nutshell, my strategy revolves around buying a selective basket of bulk-rate rares with the hope that one or more of them rises to relevance. This works for a number of reasons, each of which represents an optimization that gives you further leverage on your positions.

Selective Broad Exposure

This is a necessity of any basket strategy. You want to expose yourself to gains in multiple "sectors" (i.e. formats), like Modern, Standard, and even Pauper (where old commons act like rares).

The key to my strategy is never buying into "known dead money." This happens when you buy a complete redeemable set--you get all the Trained Orgg-caliber cards that will literally always be worthless.

With my strategy, you only buy assets you believe have intrinsic value not represented in their current (bulk) status. Review your options, discard obvious junk, and pick the best 20 or so cards you can afford with your micro-tix budget.

One note about choosing a quantity: I initially started with 100 copies of each card, but I found selling that many at once difficult, especially without moving the market at least temporarily. I have revised my strategy to only buy about half that many.

40 or 50 should still give me plenty of leverage, but I suspect I will also be leaving some money on the table.

Optionality & Minimizing Costs

Defined by Nassim Nicholas Talem,

“Optionality is the property of asymmetric upside (preferably unlimited) with correspondingly limited downside (preferably tiny).”

In our case, we are working with optionality because bulk rares are effectively at the floor; 0.01 tix is the bare minimum for most rares, as there seem to be plenty of bots that will buy any rare at that rate. Thus, you only stand to lose the tiny amount you invest above that bulk rate.

This allows us to "overpay" when necessary, going for cards at 0.05 or so, which is venturing dangerously into "predicting the future" territory! Basically, you're wagering that these cards will never get substantially cheaper, and that there's a non-zero chance of them being successful.

The nature of success makes all the difference here. A card can rise from bulk status to relevancy with a single tournament performance (even a sub-par one), and the rate of gains is fairly predictable.

Depending on a number of fungible factors, they tend to gain in multiples of 0.25. I believe this number derives from the fact that it represents a playset of cards (the largest quantity that brings gameplay utility) for the lowest indivisible unit of liquid currency on MTGO (1 tix). More often I see the card reach 0.50, and occasionally it pushes even higher.

It should be obvious that these gains are crazy high percentage-wise. Enumerating them in percentage is useless; I think about them in terms of raw dollar gains. This way I can compare the profit of the position to the overall portfolio cost without complicated math.

Let's do a simple case study to show why this works. Take a set of bulk rares chosen with selective broad exposure. I'll give some specific examples later, but let's just work with a set of 20 bulk rares across Standard and Modern.

Assume we purchase these rares at an average cost of 0.01 tix each, something that's common and reasonable. Let's pick 100 of each, to make the math easy. We will discuss the logistics of selling 100 bulk rares (and why 100 may be too many) in a moment.

The above works out to a cost of 20 tix for 2000 cards, all rares. Now we're dealing with a large number of cards and a relatively small number of tix. For the price of a playset of a Standard staple, I have exposure to 20 cards at a multiple of 100x. That's awesome in terms of optionality.

Why? Because remember what can happen to rares that break out; they go from 0.01 to 0.50 tix. That leaves you with a profit of $49 ( (0.50 * 100) - (0.01 * 100) ). That's more than double the initial investment, and we still have 95% of the positions open.

This isn't just theorycraft--it bears out in real life. Here is an example of a handful of cards that were successful bulk picks over the last year.

Each of these was cashed out, approximately, at the 0.50 tier. Some were lower, some were higher. Looking at my MTGO account today, I own 3650 rares in quantites of 20 or more. That ratio works out well if you assume a cost of 0.01 per card. In fact, it works out profitably at costs up to 0.05 per card!

Dead Money & Remainder Credit

Most MTGO accounts have store credit with a few bots, the remainders of past transactions in which fractional tix cannot be given. I make a point to keep track of my credit so I can deploy it usefully. You can usually generate a meaningful position using only credit, but you should take the time to deploy some tix as well so that you get a properly sized portfolio.

Bulk rare buying is about the only way to make use of this remainder credit, so I consider it free money.

Of course, I always try to extract tix before keeping credit, but when you have no other choice, you might as well buy some cheap options! This is yet one more way to extract leverage from an already multiple-rich strategy.

Taking Profits & Reinvesting Gains

Take profits aggressively. MTGO moves fast; you must be ready to close out the position in its entirety at any time.

My targets are 0.25 and 0.50 in most cases, as cards that jump tend to stabilize around those prices and you can cash out a non-fractional number of tix. The key here is not to be greedy. If you get a 25x or 50x return, don't worry about "future upside." Just take your profits and reinvest!

As for what to reinvest in, the issue is you can only deploy so much capital chasing after bulk rares. As described above, you can only deploy about 20-30 tix at a time. The key is what you do with your profits.

Of course, feel free to invest those profits into cards you plan to play. There's no better goal than free-rolling your MTGO play.

If you want to reinvest for pure profit, I suggest buying redeemable sets. As I've said, this isn't feasible with a micro-bankroll, but once you've flipped a few of these bulk positions for 50 tix, you have the capital to start looking at full sets.

Other authors have covered the nuances of redeemables, so I will leave it to them to explain. I will simply say that, timed correctly, redeemable sets are generally profitable and follow predictable cycles.

Booster packs (another topic our authors have covered) are a similarly predictable asset, but they lack the game play utility of complete sets. Sets also give you the opportunity to short-sell, yet another way to add leverage to your portfolio strategy.

My Current Picks

I'll end the theory section here, and show you what a basket of bulk rares looks like. This is a sample of my current portfolio, representative of what I believe are the most promising positions. Not all of these are 0.01, but most are under 0.05 at the time of writing (my max for bulk rares).

8 thoughts on “Insider: Making Money by Being Wrong – MTGO Penny Stock Picks

  1. Great article, Kelly. I’ve been looking for a way to get back into MTGO and this may be how I approach it for now with a long-term goal of utilizing set redemption strategies outlined here on QS. Good stuff!

  2. In addition to intrinsic value, redeemable sets also somewhat have a time-value priced in? As the window to last-order redemption closes the bulks in those sets might deflate the 0.0x tix as it reaches close to ‘expiry’. Modern specs under this strategy is less likely to suffer this problem.

  3. I’ve played this sort of approach in paper. Plenty of chaff sitting around, but Mastery of the Unseen, Outpost Siege, Kolaghan’s Command and Ojutai’s Command are among the successes.

    It does take a little bit more future predicting, though, since the spread between buy-in and cash-out is probably smaller (percentage-wise) in paper, plus having to deal with fees etc.

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