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Insider: The Intelligent Magic Investor

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The Intelligent Investor, written by Benjamin Graham, has achieved an incredible feat. Despite being written over fifty years ago, it has remained relevant and is considered by many a timeless collection of powerful investment ideas.

When I wanted to learn more about investing in Magic cards, this is one of the first places I went in search of some knowledge and wisdom. I'll outline in this article some of the main ideas I took away from the book and how I apply them specifically to investing in Magic.

Many of the ideas I will outline below are very basic. You might be tempted to think that you already understand these ideas and that they therefore are of little use.

You would actually probably be correct in assuming to understand them. The trick, however, is to be so hyper-aware of these concepts that you can implement them perfectly into your own investment strategies. The ultimate goal of this article is, therefore, to increase awareness.

Investing Versus Speculating (Gambling)

(Note: in the Magic community we usually refer to speculating as betting on a card that has not yet been proven, or in other words betting on a card that has the chance to flop. In his book, Graham uses the term speculating synonymously to gambling.)

Graham dedicates the first chapter of The Intelligent Investor to making a clear distinction between an investor and a speculator. According to Graham, "an investment operation is one which, upon thorough analysis, promises safety of principle and an adequate return." A speculation on the other hand, while it may have potential for a high return, does not promise safety and is likely the result of little to no analysis.

So how can we make sure we are making investments and not speculations? The answer, according to Graham, is in "value investing."

Value Investing and Mr. Market

If the speculator makes decisions based on price, then the investor makes decisions based on value (and its relation to price). The key to value investing is to make sure you are only buying when an asset's price is sufficiently low relative to its value.

Graham has us imagine a business partner, Mr. Market, who each day offers to sell us his shares in the company. Mr. Market happens to be a manic-depressive and offers prices that range wildly based on his current mood. In this scenario, we wouldn't let a high or low price influence our beliefs on the value of the shares. Instead, we would try to buy when Mr. Market offers a pessimistic price and sell when he offers an optimistic one.

In Magic this means not being overly swayed by the market price when it is being heavily influenced by speculation. This could be a huge buyout or it could be everyone panic-selling their cards that just got scheduled for a reprint. A good recent example is digital copies of Force of Will when Eternal Masters was spoiled.


Ultimately, in order to correctly assess a card's value we need to develop knowledge and experience in investing in similar cards.

Adequate Knowledge, Tested Judgment

Graham references adequate knowledge and tested judgment as prerequisites to a good investment. In other words you need some degree of expertise and specialization in order to make a good bet. Warren Buffet refers to this idea as circles of competence.

What does that mean for us when we invest in Magic? In one word, it means focus. It means that we should specialize in a particular type of investment based on our own personal strengths.

Do you have a strong grasp of a Standard? You should probably double down on your Standard specs. Have you been playing Affinity in Modern for three years? You probably have some competitive insight into whether or not a new card will fit into the deck.

Play to your strengths, and above all, do not be tempted by opportunities that are outside of your circles of competence. That is one of the easiest ways to lose a lot of money.

Courage

Have you ever panicked and sold a card because its price was dropping only to see it later rise back up to where you had originally anticipated it would reach? I know I have. Our basic human natures will lead us astray and the solution oftentimes is courage.

"Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it---even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right. Similarly, in the world of securities, courage becomes the supreme virtue after adequate knowledge and tested judgment are at hand."

Courage is the ability to stick to your guns when Mr. Market is telling you otherwise, and it can only be built on a foundation of adequate knowledge and tested judgment.

Margin of Safety

"In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, 'This too will pass.' Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY. This is the thread that runs through all the preceding discussion of investment policy..."

In the value investing framework, the margin of safety can be thought of as the minimum gap allowed between the price and the value of an asset you are going to buy.

In our Magic investments this means allowing for a significant gap between the expected outcome of an investment and the price paid such that if things go wrong we still won't lose too much money.

For example let's say that your margin of safety dictates only investing in cards you expect to double in price. If your calculations happen to be wrong or if some unforeseen unlucky event occurs, you still have a lot of room before the investment will lose you money. No matter what system you use to determine the future prospects of an investment, you can incorporate this idea of the margin of safety to ensure you only take good bets.

Some Standard MTGO Picks

As an experiment, I'll start listing some cards at the end of my articles that I think are currently a good investment (and at what price I would buy them). I'm normally in the "teach a man to fish" camp rather than the "give a man a fish" camp, but I think some readers may prefer this method. It also may give you some ideas for your own investments, as well as give me a bit of legitimacy if the picks turn out well.

The following are all (online) Standard picks that I would sell either towards the end of their time in Standard or earlier if the meta shifted towards them seeing more play. I think these are all strong cards with Constructed potential that will have a hard time falling much lower.

OGW

BFZ

ORI

DTK

Song of the Week

We Lost the Sea - Challenger: Part Two - A Swan Song (post-rock, instrumental)

 

As always, thanks for reading, and please let me know if there's anything you want to see more of in my articles! At this point I can take things in many different directions and will tend towards whatever is most in demand from the readers. So be sure to chime in!

- Luca

2 thoughts on “Insider: The Intelligent Magic Investor

  1. “For example let’s say that your margin of safety dictates only investing in cards you expect to double in price. If your calculations happen to be wrong or if some unforeseen unlucky event occurs, you still have a lot of room before the investment will lose you money.”

    That’s not how Margin of Safety works. The margin is the difference between your purchase price and where you estimate it might DROP to, being comfortable with that margin. Just because you estimate it might double doesn’t mean you have a 100% margin of safety.

    1. Margin of Safety, as I see it, is an overarching concept which says: given some metric that determines whether or not to buy, make sure that your cutoff “price” is sufficiently low such that even if things don’t go as expected, you won’t suffer a huge loss. I think we are both on the same page here.

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