Quick note from the author: I am a young investor and Wall Street enthusiast. I also speculate on Magic cards and play most formats (poorly). As with any market, there are similarities between the stock market and the market for Magic: the Gathering cards. Thus, any knowledge of technical analysis, portfolio technique, and economics can be applied to both investments. Remember: profit is profit, whether it’s in a playset of [card]Bridge from Below[/card] or in shares of Intel!
Hi. I’d like to introduce you to Mr. Market. The world of Magic finance is not very different from the world of stocks. If we understand tested strategies from Wall Street, we can be ridiculously successful when we apply them to Magic cards. Thanks for reading part one of my Market Overview and Primer! Today I’ll present some key investing terms and relate them to the world of Magic finance. I’ll also post a second article about market shocks, Apple stock and the Legacy market.
Bullish/Bearish: These are investor opinions on individual stocks or on the market in general. If I’m “bullish” on Bank of America stock (BAC), I believe that the shares will gain more value than the broader market. If I’m “bearish” on BAC, I believe that this stock will under-perform in the market and/or lose significant value. Unless specified, “bearish” and “bullish” are usually short-term projections (6-12 months), since it’s assumed that most company stock will gain value eventually, due to inflation. It is possible (and common) to be bearish on the market in general but bullish about certain stocks, and vice-versa. Likewise, in Magic finance, I hold a bearish view of the current prices in the Modern format while being bullish on certain cards in it, such as [card]Blood Moon[/card], that haven’t yet made a justified run.
IPO: This is an “Initial Public Offering.” All companies begin as private entities in which all the profits belong to the owner. When an owner wants to raise large amounts of capital (aka cash), they file for an IPO and take their once-private company public. This is complicated, but the end result is a situation where investors buy shares of ownership in the new company stock and the company raises millions (or billions) of dollars to expand its business. The new shareholders take a risk by owning a tiny percentage of an unproven company and hope to be rewarded by quarterly dividends (small percentages of profits paid back to investors) or stock buybacks (a CEO’s decision to use profits to remove the total number of shares available; in Magic terms, this would be like Wizards of the Coast buying Dual Lands from dealers and ripping them up to reduce supply and increase demand). IPOs are worth explaining because the Modern format is behaving like a giant IPO for the Magic community: a new, untested product that is luring big money from speculative investors. It should be noted that the majority of IPOs lose value in the first six months because they are unable to live up to the hype. However, since every public company must begin this way, no investor wants to “miss out” on the next Apple, Wal-Mart, or McDonald’s stock. Thus, most IPOs continue to “sizzle” for a few days or weeks and then gradually drift downward. Most recently, the Dunkin Donuts IPO, filed in late July of this year, is a prime (and not unique) example:
I believe that we should be as cautious about entering an untested format so bullishly with our wallets as we would be about entering an untested IPO. All the market data in the world suggests that we will be able to buy shares of Dunkin Donuts cheaper in the future and that we will be able to buy Modern format staples cheaper also.
TA (part one): Technical Analysis. You really didn’t need me to explain that one, but it gives me a chance to explain charts. Any time you see a price chart (values on the side and time on the bottom) AND lines drawn in OR opinions added, you are looking at Technical Analysis. Someone has taken the raw data of a stock, analyzed it mathematically, and converted it his interpretation of the future of that stock. I need to stress that TA is only based on data, not opinion. For someone to say that shares of Target (TGT) will go up because it’s nicer than Wal-Mart and he likes the Target experience more is just a preference, not TA. Preferences are nearly useless. Likewise, in the world of Magic finance, we are overrun by preferences and we crave analysis. Statements like “[card]Birthing Pod[/card] is amazing and it deserves to be a $10 card” are not helpful outside of your local store or playgroup. Hundreds of cards might be “amazing” to you (and to me), but [card]Frost Titan[/card], [card]Green Sun’s Zenith[/card], [card]Batterskull[/card], [card]Koth of the Hammer[/card], and [card]Abyssal Persecutor[/card] would like a word with you. How is your initial investment in these playsets?
What’s more helpful than hearing someone’s preference on [card]Birthing Pod[/card]? How about: “[card]Birthing Pod[/card] debuted at or under $2 and has consistently sold out on major websites at each escalating price point. It is becoming a major archetype in Standard by filling the hole left by Jace and [card]Stoneforge Mystic[/card], while simultaneously being a necessity in green Commander decks, and pros are testing it with success in the Modern format. StarCityGames sells it at $5 and buys it at $2, which establishes a floor for entry. Lastly, here’s a price chart for the available data”:
Again, outside of local scenes, preferences don’t significantly affect pricing. Only accurate data, supply/demand curves, and solid analysis of player trends affect pricing for Magic cards.
TA (part two): Technical Analysis. Now that I’ve explained why hard data, charts, and solid TA are the only ways to make good financial decisions in the market, I need to tell you that it’s virtually impossible to do these in the world of Magic finance. To help me, I’m going to pull up the 200-day chart for Chipotle Mexican Grill (a company we all love):
Besides being a great example of solid TA, the chart shows us that CMG has been moving in a well-defined “channel” for about six months (February through August). The top part of the channel is drawn by connecting the largest peaks, while the bottom part is drawn by connecting the lowest lows. Volume (the number of CMG shares that exchanged hands) is shown by the bar graphs at the bottom (greens were positive for the day and reds were negative for the day). A novice trader might look at this beautiful channel and feel safe buying shares of CMG, since the overall channel trend is undeniably positive. Unfortunately, CMG is at a crossroads and the next 30 days will tell us if the channel will continue or reverse into uncharted negative territory. The tiny purple line shows us a significant downtrend and a possible new channel being formed. Whether CMG will break out of this new downtrend depends on whether it holds its support at 276 or falls through.
Why would I waste your time on Chipotle stock? To explain that we simply don’t have access to such beautiful and pure data as the CMG chart above. There are two frustrating reasons why we’ll never have dependable TA:
1) Whether you buy stocks at your computer, through a bank’s investment service, or through your company’s 401K program, your order must be submitted through the New York Stock Exchange, aka NYSE (or an international stock exchange, but let’s keep it simple). There’s literally no way to own any stocks “under the table,” since they are digitally assigned to you and protected by the SEC (the Securities and Exchange Commission, not the NCAA one). Because of this, there is an exact log of every entry and exit for every stock, bond, mutual fund, ETF, or other security. All of this data gets processed and spit out in real-time and is easily available on the internet for your consumption. In contrast, when you buy a Dark Confidant from your local store or a fetchland from TrollandToad, guess who records that price, processes it, and then puts it in a real-time chart so that the Magic community can keep track of card values? Nobody does that. We literally have no way to collect dependable information for the last 18 years of Magic finance. To their credit, Apathyhouse has done a passable job on certain cards (and I use their charts because that’s all we have) and TCGplayer has instituted some chart features recently (unfortunately they don’t extend beyond the current Standard format).
2) We don’t even have access to the simplest, most basic investor information: the set-by-set supply numbers for Magic cards. A supply-and-demand curve is the cornerstone for commodity markets, and without accurate numbers on how many of each card is printed and sold, we can never be certain of a card’s expected value. How many [card]Sword of War and Peace[/card] have been printed in the English language and how many of them were actually opened in sealed product? Honestly, we’ll never know because Wizards doesn’t release that information. In Wall Street terms, this is absurd; shares of a company could not be priced without knowing the total number of shares. A stock’s “market cap,” the total dollar amount of all the shares added together, tells us how valuable a company it is and lets us compare it to another company. For example, one share of the banking company Wells Fargo (WFC) trades for about $25 today while a share of one of its rivals, Citigroup (C) trades for $30. If we don’t know the number of outstanding shares for each company, we would conclude that Citigroup is the more valuable brand, right? In reality, though, there are more than twice as many shares of public Wells Fargo stock (5.2 billion compared to 2.2 billion), which puts the market cap for Wells Fargo at about 130 Billion while the Citigroup market cap is a mere 87 Billion. You already know how this applies to Magic cards, because you intuitively know that rare cards from smaller sets like Legends or Arabian nights are worth more than rare cards from a Core set. While we don’t have hard data on how many [card]Moat[/card]s or [card]The Tabernacle at Pendrell Vale[/card] exist, it’s reasonable to assume that there are less available than rares from a recent set. For another example of market cap, let’s look at the Titan cycle, Primeval specifically. Is [card]Primeval Titan[/card] worth more or less today than he it was 1 year ago? Here’s the most recent data we have from Apathyhouse:
M11 [card]Primeval Titan[/card]
The answer shouldn’t surprise you, but it might. In market cap terms, Primeval Titan’s stock is worth almost exactly what it was worth a year ago. Using rough numbers, we can assume that nearly the same amount of M12 has been opened as M11 last year and the Mythic rarity follows the same ratio of 8 rares to 1 mythic. So the supply (or shares outstanding) of [card]Primeval Titan[/card] has doubled while the price has roughly fallen in half. Thus, the market cap has remained the same because the shares were diluted (more supply), causing the share price to correct downward. Wizards calls this a reprint while Wall Street calls it a new public share offering. In short, we intuitively guess at market caps with Magic cards, but we’ll never be certain until Wizards releases set data (but don’t hold your breath).
TA (part three): Technical Analysis. So we’ve talked about how essential good data is and how difficult it is to find in Magic: the Gathering. Because of that, investors often accept poor substitutes for solid TA. Let me suggest that the following data sources are not dependable, but we (unfortunately) seem to pay attention to them anyway:
1) Projected card prices based on preference. We covered this in TA: part one.
2) EBay auctions. These are not worthless, but they are far from dependable. An EBay auction is so contingent on how the auction is worded, which time zone the auction takes place, and how reliable the seller’s description and feedback are that I can’t put too much faith in completed auction prices. As an example, the data suggests that I should not be able to get a playset of pack-foil Chandra’s Phoenixes shipped to my door for $17, but it happened this week. “Buy-it-now” auctions are much more dependable, though I suspect these are sometimes motivated by an upcoming rent check, so “fire-sale” prices may appear.
3) Personal trades. A story of your personal trade might be fun or envious, but it’s not too helpful in establishing card value. If you are able to trade 2 [card]Marsh Flats[/card] for a FOIL [card]Marsh Flats[/card], I applaud you, but it won’t shake the financial data in my head that Zendikar fetches should be trading at a ratio of 3 regular to 1 foil.
TA (part four): Technical Analysis. Is all hope lost for helpful financial data on Magic cards? Not so fast! Markets are by nature efficient machines. The price that players are willing to pay is the most helpful tool for card values. Do you think StarCityGames really thinks that every new Planeswalker is worth $50? Is it a surprise to you that only one Planeswalker has held or increased its pre-order price? Online stores are not stupid. Their influence allows them to hype new Planeswalkers, display a limited number of them at a high price, and then “sell out” of pre-order copies. This drives other people to be fearful that they may miss out on the next Jace at a low price. The online store then “restocks” their imaginary inventory of the Planseswalker in question with a price increase, and the cycle continues. Most often, a card is worth what people are willing to pay for it. However, there are exceptions. After all, if the market were completely efficient, no one would ever make money on singles, right? Since we’ve talked about unhelpful sources of pricing information, let’s look at some that can be useful:
1) Buylists of online stores. If you’re selling cards, you can almost always do better by selling on EBay than by selling to a store. Duh. But if you’re a buyer/speculator/investor, a store’s buylist can be extremely profitable. Spend some time with these prices, because they usually establish the “floor” (rock-bottom price) that a card is worth.
2) Online Supply. This is very hard to track, but can pay off enormously. For example, my brother is an avid and skilled Legacy player. In late 2010, he began to watch prices of [card]Grim Tutor[/card] because it was a staple for Storm combo decks. Since [card]Grim Tutor[/card] is one of the only valuable rares in a tiny set (Starter 99), it’s a fantastic case study. We can expect a slow and steady climb from this out-of-print and in-demand cards, but he noticed a new problem: he was having trouble actually locating them. Day by day the supply dried up until one day there were only 4 copies on the internet. Over the course of two weeks, the in-stock price had only increased 20%, but virtually no one had them! This is often a gold mine for Magic investors. Remember [card]Candelabra of Tawnos[/card]? Fear is a fantastic motivator!
That’s it for today. Next time I’d like to look at “market shocks” by studying Apple stock and how it relates to the current Legacy format. Thanks for reading!
Questions? Comments? Let me know at ryanshawnmayo@gmail.com or @mtgtails