Previous published on SCG Premium on 8/3/2011.

Tim Aten used to complain that article introductions were the hardest thing in the world for him to do. He was never satisfied with them, and often the inability to create a clever introduction stopped him from writing at all. (These days sheer laziness and palpable misery do that instead.) Me, I rarely have that problem, but some days I do have trouble finding my own voice.

“Howdy y’all and welcome to another edition of The Mag…” wait, that’s not me.

“Yo bitches, how you is? We got some hot jams coming for you this week…” nope, missed again.

“I love pizza. In fact, when given the choice of pizza and anything else in the world, I choose Tombstone…” Hrm, too miserable. Can frozen pizza choice be a metaphor for life outlook?

“I Got 99 Problems but a Spec Ain’t One!” What’s that? Too sensitive, obvious, and overused? If I just deleted my Open Letter, would it make the whole Magic Branding kerfuffle go away?

Screw it—just look at Lil’ Jon and Ryan Seacrest here while I take a moment to compose myself.

*moment*

In my last article for SCG, I delivered a bunch of rules to help guide you through the choppy waters of Magic Online speculation. This week I’m going to address some elements of portfolio diversity and risk management, but first I wanted to outline and define the three principle types of speculation I have been using for the last year.

Speed

These opportunities arise primarily when a new set of decklists is released from a Pro Tour, Grand Prix, or SCG Open. When this happens, there is a mad dash to digest the information and then buy cards you think are currently undervalued based on the new information. This happened last week with Ben Swartz winning the Legacy portion of SCG Seattle with Hive Mind. Two other Hive Mind decks in the Top 8 took the price on the poo rare from M10 from .12 to .50 in the course of a week. I was happy to profit-take with some of my supply at .35, but I actually think Hive Mind will have legs in the format, which is why I kept most of them.

Beyond specific examples (which occur basically every week), this type of speculation purchase is based on getting there before everyone else reads the same info and buys out the same cards at the old price (or before the bot owners change prices on you to try and keep any profits for themselves). Hence Speed.

Tectonic Shift

This one happens when there is a dramatic and often unexpected change to the world of Magic. Bannings or new format announcements are the recent triggers that have changed demand for a certain subset of cards. Though recent events might make you think otherwise, these are usually relatively rare and off huge potential returns if you are on top of things right away.

Value

This is classic stock market speculation. Apple announces the iPod, and you think, ‘Man, that is going to be huge—I’m going to buy Apple stock right now.’ You were exactly correct and made a huge profit on your original investment, congratulations.

The scenario is similar for Magic cards. By looking at basic demand factors like deck popularity and format growth combined with supply factors like promos, quantity in existence, and potential for reprints, plus price floors and ceilings for similar cards, you can approximate what you think cards will be worth in 3/6/12 months. Once you do that, you figure out if you want to buy and hold on to those cards as a growth opportunity. If these were stocks, you would call this ‘an investment,’ and that’s exactly what Magic speculation should be viewed as.  If you had bought Revised Underground Seas for 15$ in 2005, you’d have an investment that had gone up over 600% in six years. That is an incredible rate of return, and one that any investment manager would kill for.

The frustrating part about Magic Online is that you don’t actually know how many of a card exists (outside of certain promos). In the real world, we know there were about 289,000 copies of Underground Sea in Revised. On Magic Online we have no ****ing clue how many copies of Underground Sea came out of Masters Edition 2 or Master’s Edition 4. We also have no idea how many total copies of Jace, the Mind Sculptor were opened, nor do we know how many of those were redeemed into real-world copies. In short, trying to do actual math with supply factored in is a nightmare. What you end up doing is making guesses about relative supply based on sets with similar distributions and then cards with similar demand curves, but every number you come up with is marshmallowy guesswork. I would guess the large bot networks could extrapolate actual supply based on their own inventory and sales data, but trying to do this type of thing as a mere mortal is a bit of a nightmare.

Welcome to my world.

Designing and Constructing Baskets

“Don’t have all the eggs in your basket be the same egg.” —old Spec saying

In this case, a basket is a group of cards you have speculated on with a specific concept in mind (like Legacy or Commander or Jace-Will-Be-Banned or Caw-Blade-Will-Still-Win or whatever—technically you could just have one basket you call your Spec Basket, but I like working with clear themes). I call them baskets because calling them portfolios sounds pretentious and would really confuse all the Vorthos people, who would probably get really excited because they think you are talking about art to them when really you are talking about boring, old money.

Why should you care about such things? Well, all money you put into speculating exists on a risk-reward spectrum. Those things that offer high reward at very little risk are awesome while those that offer low reward and very high risk are terrible. In general, all Magic cards lie somewhere in between. One of the major ways to mitigate risk is to diversify your investment across many cards, so that a plunge in one or two won’t cost you all of your money.

Say you wanted to create a basic 1000-ticket speculation basket last September (after M11) of ‘Good Standard Mythics’ for the coming year—how would you go about it? In recent times, Standard has been dominated by powerful creatures and planeswalkers, particularly in the mythic slots, so you might want to focus there.  Beyond that, you know you definitely want to branch out into multiple colors with your spec basket in case one color ends up particularly weak in the new format.

The first thing you did was buy Baneslayer Angel at the now bargain price of 17.50 (d’oh!). Your rationale behind this is that this was the most expensive creature in Standard last season and you figure it will still see plenty of play. You also spotted that Jace was awesome and a relative bargain at 75tix, and you bought more than you needed of each Titan (except Sun because he was the Prerelease promo) because they all seemed powerful and absolute cannot-miss STD cards, even if you didn’t know which ones might break out. Finally you added some Lotus Cobras into the mix and off you went.

(Note: All values approximate and used for explanation purposes only.)

If you had held on to those cards the entire time until May and then liquidated, you’d end up with about a 6% profit—not great, but you beat inflation. Despite the fact that both Baneslayer and Primeval Titan completely crashed, you ended up with a small profit because you diversified your holdings across colors, making a hefty amount on Inferno Titans and Jace, and a small amount on Cobras and Grave Titans.

Now switch it up for a minute and apply some strategic sense—what would have happened if you sold at or near peaks for each card instead (and you eventually dumped Baneslayer Angel at 10 when it became clear that was a huge mistake to buy it in the first place)?

(Note: All values approximate and used for explanation purposes only.)

You still take a beating on Baneslayer, but you were smart enough to realize your mistake and folded before it hit bottom. You also take a small loss on Primeval Titan, but the peak right after Jace gave you an excuse to dump at 28 instead of 10, so you saved a bunch on that little bump. Now you would be up over 33% during that period of time. Obviously the bottom chart is a best-case scenario requiring luck and skill, while the top scenario is basically the worst. If you had chosen to create this basket, you should likely expect something more like 15% profit on your initial investment, which any financial advisor would tell you is outstanding for a year.

As I’ve mentioned before, I’m pretty cautious about speculating on Standard overall because the swings are frequent, and supply is strangely variable due to redemption. I will do value specs at the appropriate time (more on this next week), especially if I am interested in playing Standard tournaments, but overall I’m not interested in tying up a significant portion of my bankroll on a format with high volatility and randomness.

What I have been very interested in recently are Legacy and Modern. These formats are ripe with older sets that had shorter print runs and have not received a ton of thought from the general Magic populace or the dealers until very recently. Additionally, since MED4 contained all ten original dual lands, Strip Mine, Maze of Ith, and a few other important staples, I don’t think they will see print again online any time soon, adding to the intrigue for Legacy spec. Ravnica was a very popular set online and in the real world, but the Magic Online population has grown dramatically since RGD drafts were firing, making cards from that era and the short run reprint sets like Tempest block and MVI very interesting investment opportunities that have not been completely picked over.

With regard to my own speculation, one of the things I have worked at for the last month is creating a potential basket in each older format for value speculation. Which cards could I buy that would give the greatest opportunity for strong returns while mitigating risk? Once the first tier of cards were picked over, which cards from the second tier might also see play and result in big profits?

Remember, the primary purpose for this series is to teach you how to think so that you can find your own card choices for speculation and not to just toss my picks up so that you can blindly parrot what I have done, which would generally mean buying after the moves have already happened and potentially losing money in the process. Next week I have one more fundamentals article that addresses the following question: “When is the cheapest point to buy cards?” After that, I have a sweet top secret article I think you will enjoy, and directly after, I will discuss my own basket construction for Legacy and examine how those choices have fared in the first 6-8 weeks.

In the meantime, feel free to fill in the comments sections with your own picks for Overrated/Underrated for Legacy and especially the new Modern format.

–CardGame
@nextlevelspec for Financial
@mixedknuts for everything else