Part One: The Primary Market Price
Part Two: Secondary Markets
Part Three: Investment Strategy
In this epic conclusion we will be discussing some risks that can hurt your Magic portfolio and make it more difficult to produce consistent returns. Whenever you invest, you need to carefully examine the risks and decide if the potential for gain is worth the potential for loss.
Different Types of Financial Risk
There are many different types of risk and an understanding of all of them will make you a better investor and a more informed human being, but for the purpose of this article I am going to focus on a few specific types of risk that are specifically applicable to investing in MTG.
Political Risk - The political risk is when a government or administration changes their rules, which negatively impacts a business. In the world of Magic, we are really talking about the DCI. If a card becomes banned, the demand for that card will drop sharply, followed immediately by the price. Another example could be Wizards Organized Play choosing to closing support for a particular format. If Legacy were no longer a tournament format, Force of Will would decline in price.
Replacement Risk - If a substitute for your card is created, then some people will inevitably switch to that new card, reducing demand for the card that you own. Imagine if you had invested heavily in Divination, but then Compulsive Research comes out and you feel pretty bad because no one wants to play with Divination anymore.
Reprint Risk - This is pretty straightforward: if a card is reprinted, the supply will increase without demand changing at all. Everything else being equal, the market price of the card will go down. This obviously impacts the return you can expect to get on your investment. Note that there are some important counterexamples such as Tarmogoyf in Modern Masters. Sometimes reprints, like those with new art, will create a collector's market that more highly prizes the original/superior version.
Inflationary Risk - If you are trying to use Magic as an investment to make money, you have to consider the risk of inflation. If you're investment grows at 2% per year, but inflation goes up by 2.5%, then you will consistently lose purchasing power over time even though you are making money on paper (badum chee). When you trade an investment in for a particular type of currency, you open yourself up to all the risks that come along with that currency. Historically, inflation on the U.S. dollar has been about 3%, although currently it is below 2.
All of the above are known as 'Unsystematic Risks'. They are specific to one holding; a single card, single set, etc. When the market value of an asset goes up or down irrespective of the market as a whole, the cause is likely an unsystematic risk.
Systematic Risk - Systematic risk is the risk that affects the entire market. As the player base grows, the demand for cards will grow, appreciating the value of your investment. But if the game isn't selling well, the player base shrinks and demand for your cards will go down. This will adversly affect the price and lower your returns. Think of it this way: if you are the only person left on the planet who is interested in Magic, Black Lotus will have a market value of 0$. Supply hasn't changed, but demand has shrunk to zero.
There are certainly other risks that could affect your investment, but these are the most important in my mind. The next time a card that you are following changes in price, try to think about why that happened. Try to classify those changes; think more objectively about what is going on behind the scenes in the market. Having a solid understanding of the economic factors involved in any market will guarantee better returns over the long hall.
My final word on this subject: nothing in these articles should be considered as a financial recommendation, this series was meant purely for educational purposes. I understand that there is a wealth of good information out there and I encourage our readers to digest as much of it as possible. Do not consider this your one-stop-shop for investment advice. If you have questions feel free to leave them in the comments or reach out to us on social media.
I can conclusively say that this will be my last article about finance for a very long time. Next week we will have something COMPLETELY DIFFERENT!
See you then Zoners.
-GG
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