Today's article is both revolutionary and simple in its premise. It introduces you to a pricing model that sophisticated financial markets use, but the fundamentals are easily understandable. Kelly Reid and I have worked on getting better at what we're calling The System when we make runs on stores, trade and speculate on the next upcoming cards, and today, we are going to start sharing it with you - our Insiders. We have already made hundreds of dollars on this, but we can't make all the money there is to be made in this, since we don't have infinite cash to throw at it. That's why we're sharing it.

This is a principle that's stupidly simple and you might be inclined to say "Doug, why are you wasting our time with this? This is self-evident!" The System is designed to mitigate the worst enemy that a speculator faces: his own fear.

It's your fear that holds you back from hitting "buy" when you get an email from us saying "buy Olivia Voldaren" when she's $3, and it's fear that makes you distrust your own gut instincts about the next hot card. That fear feeds into a loop where you see what would have happened if you'd trusted yourself and you feel even worse that you didn't go for the good tip. Worse, you might start over-correcting and throwing money around.

The System depends on a few central maxims, and I am going to share what Kelly and I have discovered with you.

The real price of a card is the difference between what you buy it for and what you can sell it for.

This is the core principle and all others flow from it. When a currency trader considers buying British pounds or Icelandic Krona (don't!), he must consider that the transactional costs - dealer fees, conversions, credit card processing, etc., add friction to the exchange. If he turns dollars into pounds and back all day at the same exchange rate, he will go poor - he'll lose 1% or more each time, seeing his fortune shrink. The cost of a dollar, to our currency trader, is the difference between what he can buy it for - $1.00, and the price he can sell it for, after all is accounted for - $0.98, let's say. If our trader gets one dollar and the markets don't shift at all, he's risked 2% of his investment. All he needs to see is the dollar rise to cover that 2% and he's broken even. He just needs to see it rise another penny to see a profit.

People who trade on the foreign exchange know this principle well, and they use it to borrow vast sums of money to leverage against the market. Our trader borrows $10,000 to put into the bet on the dollar, knowing that if he's really only risking $200 at the outset. The cash inlay is big, but the risk is miniscule.

ForEx traders can run into big problems when the market shifts, but Magic cards are relatively stable in value over days. When you look at speculating on a card, you can depend on being able to resell it to dealers for the approximate value that you trusted when you bought it, and that price can hold up for about a week.

Let's look at an example. Kelly and I have been bragging on calling Huntmaster of the Fells early on. Why not? We've heard from multiple readers that the tip paid for their entire year of QS Insider. When we called it, Huntmaster was $11.50, which is a lot of cash. However, dealers were buying it for $9. If we bought every Huntmaster we could and immediately sold them, we'd only lose $2.50! The difference between the buy/sell price was about 21%. That means that if it went up to where playable Mythics usually go, we would see a big profit. Even if we had to sell them in a week or two at a loss, we'd only lose 20% of our investment. Of course, you know what happened to Huntmaster's price (and we seamlessly sold them back to the same dealers later in the week for $20 apiece), but let's look at something else that's a little more obscure.

Whipflare was another call from that same weekend. Whipflare was a decent sideboard card that shone in the playoff of the Pro Tour. It sold at 25 cents, but dealers were buying it for 15 cents. That means that we were only risking 10 cents on the card, not 25 cents - Whipflares would not suddenly be worth absolutely zero. The buy/sell margin was much bigger - 40% - but remember, we are looking at pennies of investment here. It pays to think big when you're looking at a card that only needs to make 25 cents to double up on.

With The System in mind, Kelly and I poured a lot of money into Whipflare and we should have pumped much more in than we did. We ended up buying 98 copies - an astronomical amount. Thanks to TCGPlayer for not canceling our orders! Of course, we "smurfed" our orders like a good money launderer would - buying twenty here and twelve there. Combined with other calls we were making, the shipping was manageable. But those 98 copies doubled in value, so our $25 investment ($15 risk) turned into $50. I know it looks like we doubled up, but we really tripled - we only put $15 on the line, after all. If we didn't keep the buy/sell margin in mind, we would have thought that Whipflares sold for zero to a dealer and not risked the 25 cents apiece. Looking it up, seeing that it had a buy price from someone, meant that the card was much less risky than it normally appeared.

Here's a thought experiment: what if I told you to pick up an old Arabian Nights card that's currently $50? Do you balk at that price? Would it change your mind if dealers bought it for $40? Now all you need to see is your card rise a little in value - a $10 value change on buylists - and you'd cover your cost. You're paying $10 to see if this bet pays off - not $50.

The size of your war chest dictates whether you make "some" money or "lots of" money.

I'll admit that my last experiment involved a little bit of cheating on my part. I assumed that you had hundreds or thousands in your trading account to get that Elephant Graveyard I was telling you about. We all take our war chest into speculative battle, full of gold and treasure. The bigger your initial amount, the more you can make. I have a finite amount, though, and so do you. Another big element of The System is to identify the smallest margins and capitalize on those, since you can only have so much money wrapped into your cards at any point.

Though you're dealing on margin risk and not actual cost, you would need $5,000 in hand to risk only $1,000 on our Huntmasters. I like to think of this as kind of like casinos that will only let you gamble on the upper floors when they know the size of your bank account, even though you're not risking the whole account that night. When you're looking at rent money vs. speculative money, you should always pay what you have to, first, but to make big profits with The System, you'll need to release your idea of absolute costs and embrace only the risk cost. It may mean putting $300 in where you only put $30 in before. After all, those Dungeon Geists that we told you to buy at fifty cents could sell to a dealer for half their price already... It may mean that you have forty copies of those geists instead of the two playsets you were thinking of buying. It may result in the fact that you made $120 instead of $20, all while only risking $12.50.

Don't risk more than 50% in a speculation.

Magic speculation can bring a lot of profits, but it can also make your money evaporate quickly if you put your money in cards that you cannot resell. The cards with the smallest margins are the most playable cards. That's because a dealer has both a demand for the cards and supply issues in making sure that they have enough to sell the customer. They'll happily buy a $10 card for $7.50 if they know they can make 25% on it all day long. They won't pay as much for something casually-popular but lightly played (so a high markup, like Gilded Lotus). If your card costs $1.00 but won't sell for anything above bulk, it'll only break your heart. You'll have enough opportunities, with cards like Whipflare, Vapor Snare, Dungeon Geists and Skirsdag High Priest, to risk only a little and stand to make quite a bit.

I'm happy to answer questions posted below, and I'm sure that Kelly will chime in, too. Until next week (with more examples of The System at work!)

-Doug Linn

We all put a lot of time and money into our collections. As a person who has had a collection stolen, I know how it feels when something suddenly disappears, especially something that takes years to acquire and money out of your pocket to replace.For some of us it's a yearbook of memories of years past, for others its a transient inventory.

How important is your collection to you? What would you even do if your collection was stolen? As I once learned the hard way, you simply need to insure your collection.

I’m intimately familiar with Insurance laws in the State of California, but things may differ in your region. This is meant to be a guide to the types of questions to ask and the types of coverages you need.

Your belongings can be insured a number of ways. The most common are through a Homeowners/Renters policy and the other is a Personal Articles Rider. I’ll talk a little about both, and let you know what to look for when insuring your collection.

Homeowners Insurance

If you’re a homeowner, you likely already carry Homeowners Insurance. Homeowners Insurance protects more than your home, it also protects all of your belongings, including your Magic Cards, without having to add other coverages!

Be careful and talk to your company to be sure that there are not limitations on certain types of collectables. Many companies have limitations on Sporting Cards but not other collectibles, so investigate this closely.

Other companies may have a limit on how much they’ll pay for any individual collectible item that is stolen. Also, your stuff doesn’t have to be stolen from your home to be covered, it covers you around the world wherever you take your stuff. Ask your company if there are any exceptions to this, especially regarding theft from your vehicle.

Homeowners Insurance pricing will vary specifically to your area and the size of your home. Talk to a professional to be sure you have adequate coverage. Also keep in mind most Homeowners Policies have a decently high deductible, so make sure that’s something you’re comfortable with, for if something happens to your collection, they will only pay for the portion that exceeds your deductible.

Renters Insurance

Renters Insurance is very similar to Homeowners Insurance, it simply does not provide coverage for the dwelling where you live. It does cover, however, your belongings in a similar way.

Typically Renters policies have better coverage for your belongings because it is the primary chunk of coverage. Renters insurance starts around $12/month and, depending on the amount of coverage you want, can be up to $40 or $50 per month.

You’ll be asked to select the amount of coverage for all of your belongings on a Renters policy. It is important you do this and not simply the amount of Magic Cards you want to cover.

For example: If you obtain a Renters policy with $10,000 in coverage, and your home is broken into and your collection is stolen, your carrier will ask why you are claiming $10,000 is stolen, but all your other belongings are still there. They will then say you were underinsured and decrease the amount of your claim.

Personal Articles Rider

A personal Articles Rider is an add-on to a Renters or Homeowners policy that provides coverage for items that are excluded or limited from the main policy. If your carrier doesn’t include coverage for your collection on the basic policy, ask them if they have a Rider available (sometimes called a Floater).

With a Rider you get to specifically state the value of your collection and choose a specific deductible for those items only. This really is the best option, but is typically much more expensive than the coverages built into a package Homeowners or Renters Policy.

Valuation

There are 3 ways Insurance Companies will value your collection, the first being Actual Cash Value.

This term may sound great, but this is probably not what you want. An item’s Actual Cash Value is its price when new less any depreciation. In the eyes of a non-collector, a 10 year old piece of cardboard is worth next to nothing, and if something happens to it, that’s what they’ll offer you.

Another valuation option is Replacement Cost Value. This means the carrier will pay you the cost (Including Shipping and Tax) to actually replace the loss with like-quality items. This is what you’re looking for if you want to actually recoup your loss. For this method, there is typically no requirement to track or log what items you own in the case of a loss, but any documentation or proof you can show will be helpful.

I suggest taking a video camera and walking through your entire house (and also scanning over your collection) and saving the tape in a secure location away from your home (preferably at your insurance agent’s office). In the case of a loss, they will do some research and find out what it would cost them to replace it and make you an offer.If you accept they cut you a check, or you have the option to prove to them it would cost you even more to replace.

The third option is Agreed Value, which is what’s typically seen on a Personal Articles Rider. Upon entering the contract, you and the insurance company agree on the exact value of all the items covered, and you must provide a list, or other proof, of what items you are covering. This guarantees that you will receive the value you expect from any loss.

Wrap-up

The key to protecting your collection is asking a lot of questions. Know what’s covered and know what isn’t. Ask specifically about how thefts away from the home (at a Magic Event, for example) are handled in the claims process and how they value collectibles.This is one way you will see the difference between the discount companies and the major carriers.

Remember, if it only costs you a fraction more to be with a carrier that actually protects the items that are important to you, its likely a good idea to switch.

I’m happy to answer any questions about insurance in the comments below!
Guard your stuff!