Welcome back, constant readers

Last time I think I made it as far down the “Greater Fool Theory” rabbit hole as wikipedia pages is going to take me. I think we covered some new ground and maybe we’ll get some of those concepts to stick. We might; I caught someone on Reddit encouraging someone not to be a “baggage holder” which I thought was pretty sweet. I made a case for not buying when it only helps people who bought in cheaper. What say we put an end to all the non-traditional finance articles for a while? It was cool to delve into theory for a while, but I felt like I covered “don’t do this” thoroughly. What should you do when you’re not too busy not doing that stuff?

That’s a good question. I think I am going to go back to what I know. And what I know is that if you live in a somewhat densely-populated region of the world, there is a good shot you’re fewer than 50 miles from Magic cards you want and that are owned by someone who doesn’t know what they’re worth.

I know that somewhere in the United States there is a guy who owns a computer repair shop and sells Magic cards out of a dirty, cracked display case. He looks up card prices in a Scrye magazine from 2003 and takes mint condition cards out of a cardboard longbox and gives a discount if you pay him with cash. The cards in the case are just for show- he only sells the cards from the longboxes that have been untouched by human hands for years. I know because I bought Sylvan Libraries from him for $4 and we talked about Baseball.

I know that somewhere in the  United States there is a guy who has a few dirty binders behind the counter of his comic book shop. He priced the cards back during Mercadian Masques and he has a computer that he uses as a cash register, but it doesn’t connect to the internet. He writes receipts by hand with an ornate silver inkpen and figures out the tax in his head. I know this because I bought Unhinged booster packs from him at MSRP, Tower of the Magistrates for $2.50 and a Karakas for $5 when they were $40 and we talked about our favorite “Daredevil: the Man Without Fear” writers.

I know that somewhere off a dirt road that you will only access if you make a wrong turn as I did there is a store called the “Antique Barn” with an old cracker barrel out front with an electric lamp that only looks like an oil lamp and inside they have a box of Magic cards with a handwritten sign that says “Each card $1 dollar[sic]” and I bought three Goblin Lackey, four Recruiters, five Elephant Grass and a Sterling Grove for $1 each. When I asked how much he would sell me Portal Basic lands for he said “Whassda sign say?” before spitting chewing tobacco spit into an Ice Tea bottle. I left the lands.

I know that when I go to a town I’ve never been before, I do what you would do. You pull up the Wizards Store locator and just see if there is a place that sells cards, holds events, has a community. You’ll drive past it until you realize you saw a cardboard cutout of Gideon or a sign with Jace on it, sun-weathered and dog-eared, and you’ll turn the car around and go back. They’ll have cases full of cards and they’ll look the prices up on Star City Games and knock 5% off and beam magnanimously like they offered you a free gold bar instead of cards that are still 15% above TCG Player. You’ll look for two minutes then pack back into the car. If there are five places in that town, four will be like that and one of them will be OK.

I know this because Ryan Bushard and I like to go on shop crawls and hit lots of stores. I wrote about one of them on QS a million years ago. We called dozens of shops ahead of time to see which ones we could eliminate based on a phone conversation and still hit a lot of busts. We hit a few great ones, too, but the best shops we hit were on accident. People who do this sort of thing usually do it wrong. I know, I did it wrong for a long time, and I still do.

How often do you check your local Goodwill? I have found cards there. I haven’t found anything great, but if Reddit is to be believed every few months someone somewhere will hit it big and find very good cards for almost free. I have ruled out my town. Have you? You live somewhere after all. Mothers clean out closets when kids go to college. Good stuff ends up in odd places. It takes five minutes to look.

Your success rate at garage sales is going to be under 5%. Better go to at least 20 in your life if you want to beat the odds. Have you gone to 20 garage sales looking for cards?

You want to know the REAL goldmines? Baseball card shops. Shops that sell gold coins and geodes and old, weathered newspaper clippings in vinyl bags. Flea markets in small, flyspeck towns. You think you’re going to show up in Duluth Minnesota and find a $5 Karakas in a binder ten minutes before an FNM starts with people elbowing you out of the way so they can buy sleeves or pay their entry? You think you’re going to find good singles in a binder that doesn’t have a layer of dust on it?

I would wager there is a store in the town you live or an adjacent one you’ve never set foot inside. It doesn’t look on the outside like it has Magic cards inside. That’s the point. You want to be first. You want them to reach down underneath a counter, or move a stack of comic books to uncover an old box. You see Pokemon cards mixed in? Great, they aren’t looking that up on Star City. They’re probably going to take an offer on the box. I’d wager there is value fifty miles from where you’re seated and you never thought to look there because no one thought to look there. I used to think I had to go far from home to find the value. There couldn’t be anything close to where I live, right? I would have found it already.  Someone I know would have. How are you supposed to find undiscovered treasure if you think like everyone else? Start ruling local places out. Widen your search to neighboring towns.

I played FNM and booster drafts for 18 months in a motorcycle garage after they closed for the night, two card tables jammed between displays for helmets and gloves, the air smelling like oil. Should you check every motorcycle repair shop and used car dealership and petting zoo for singles? I can’t tell you what to do.

But I know no one else checked there first.

Finance Quick Hits

• We don’t know much about Born of the Gods, but neither does anyone else. We’re getting a G/W Temple. Expect GW stuff to increase in price on hype alone. Be a seller, not a buyer in those situations.
• Kiora looks pretty bad to me, but there is hype. Temple of Mystery is at its floor. $5 is demonstrably the ceiling for a temple, but Kiora hype could make this happen and that’s a double-up.
• Kami of the Crescent Moon is selling for $6 on TCG Player. Check any and all gold coin stores and computer repair shops near you. A lot of weird stuff spiked this month.
• It’s too late for Genesis Wave, but if that deck is a thing, cards like Primeval Titan have room to go up. Be prepared.
• Sam Black is brewing in Modern. Pay attention when Sam Black brews.
• When the new set comes out we will still be using packs of Theros to booster draft. Take this into consideration.

Hello, Constant Reader

In the last installment, we dealt with the Keynesian Beauty Contest and how thinking rationally and a few steps ahead can lead to your avoiding potentially ruinous decisions. Taking into account what everyone else will likely think in a given situation is how you make the best possible informed answer.

In my research for the last piece about the Keynesian Beauty Contest, I stumbled across some reading about the concept of Nash Equilibrium. Did you see “A Beautiful Mind”? Well, that John Nash, portrayed by Russel Crowe in the film proposed the theory. Stated simply, Nash Equilibrium is a Mexican Standoff. In a non-co operative game, situations can arise where each player who knows the other player’s best strategy will not benefit from changing their own. They are essentially in a deadlock, or in Equilibrium.

What defines this equilibrium is whether party A is making the best decision they can, taking into account the decision party B will make, and that all hinges on on Party B making the best decision they can accounting for what Party A is likely to do. This doesn’t even have to be a dichotomy, as any number of players can be involved and they will only be in equilibrium if they make the best decision they can given all of the other players’ decisions AND provided they don’t change their decision.

I got into this topic because I believe artificial price spikes are the kind of system that can be modeled using this theory, but I also believe that in the case of artificial price spikes we don’t have a true Nash equilibrium because I believe there is a party integral to the system that is not making the best decision they can for themselves but rather the best decision for the system based on faulty logic on their part. The result is the same, though, because the decision they make does not disturb the equilibrium of the system. I maintain, though, that it probably should.

In a lot of ways the “cog” in the middle of the great machine is most important and also most tightly-bound to the rules of Nash equilibrium. At its core, it’s a theory that says once equilibrium is established, no one can do better by changing their behavior. Unfortunately, that’s true.

Moving Parts

Why is it the middle cog that is so essential? It’s really simple – in this case, the guts of this equilibrated system are the greater fools we discussed earlier. To recap briefly, the Greater Fool Theorum as applied to Magic finance is a premise that means some people buy into a spiking card and can only expect to make any money if someone more gullible buys the card from them at a higher price. These greater fools are what makes it possible for artificial spikes based purely on hype and buying frenzies to occur, and their unenviable position makes these systems follow the rules of a Nash Equilibrium. The only reason this works has to do with how someone becomes part of the system.

If you are participating in a card spike, you get “in” when you buy in. The first buyer is a store or individual who bought the card for its pre-spike price either because they wanted to have it to play with / in inventory or because they saw the spike coming. There is hype, either from deck results, conjecture or someone initiating the price movement with a big buy-out of a site (it only takes one site, usually; the rest fall like dominoes) but the system is not in equilibrium until there are more players.

This is where the greater fools come in. They buy at a post-spike price that may be lower than the peak price, but once they buy in, they are sunk. They absolutely have to hope for even greater fools to buy from them at the spike price or they are sunk. Lots of people break even in this position, and it’s no fun to be in for a few reasons.

The hallmark of these artificial spikes is a card starting at X, spiking to 2X when it’s bought out, peaking at 4X at the peak of hysteria and going back to 2X as people undercut each other trying to rid themselves of copies of the card. Inevitably in these cases, a lot of fools who buy in at 2X end up bagholders and sell out for 2X again.

The worst part about their position is that they are locked in to Nash’s theory of equilibrium as soon as they buy in. What are their options? Sell out at 2X immediately? That doesn’t help them out of the jam they put themselves in. There really is nothing they can do to improve their position but wait and try to sell to a greater fool, and their inaction doesn’t violate the equilibrium of the system. They really have no options except for hope, and hope is not an investment strategy.

For the other actors, they have few options as well, and they get forced into their positions. I’m not sure you can have a true equilibrium as envisioned by Nash (who also envisioned people who weren’t there, so what does he know?) when people have their initial move determined for them, but I would argue that you have the option to stay out of it, so even making forced moves is still abiding by equilibrium because doing anything else but making the forced move (or staying out of it) is not going to give you a better outcome and therefore are bound to the system. So a player who wants the card to play with doesn’t have a choice but to pay the card’s price at the time they buy in.

One actor we’ve ignored until now is the actor who initiates the price spike. Could this person or persons act in a different way and end up better off? This is the true test of the theory as it applies to the scenario I have concocted. When you think about it, buying low and selling high is probably the optimal play, dumping as many copies onto the market as fast as they possibly can is probably the optimal play (for them) and maximizing their profit in the shortest time-frame possible is probably optimal. There is really nothing they can do to improve on this, and in so many of these cases, this is exactly what we see happen. This actor is in an enviable position, but that doesn’t mean there is any benefit to breaking the rules and making a different play than the one everyone expects.

The Point

Why do we care about the concept at all? Even if you agree with my analysis (assumptions) about the system, what good does establishing the system is a Nash equilibrium do?

I maintain that mtg finance is cooperative, as all system bound by the theory must be. If you buy cards, you help the seller. If you sell cards, you help the buyer. And if you buy an artificially-inflated card for 4X, you help the guy who bought them for X and knows that 8X is a pipe dream. Since this is the case and once you lock yourself in and pay 2X or 4X for a purpose other than just playing with them, you’re locked in. You will not benefit by doing anything other than what everyone expects, and if you think that position is unenviable, it’s probably best to win the only way you can.

Don’t play.

“Jason” people are always asking me “why are your finance articles so boring and heady when your articles over on Quiet Speculation are so fun and so closely resemble fart jokes?” I honestly don’t know how to answer that. I suppose my goal with this series is to delve a bit into some of the things I’ve learned over the years and write a serious article series just to keep people guessing. After all, isn’t that the greatest possible fart joke there is?

Joking aside, I want to launch into a topic that may help you not end up making poor investments in the future. I think there are two types of speculators in the markets, and both are essential to the process. You want to be one of those kinds of speculators and the other kind you do not want to be. At all. Let’s name the two kinds up front and then talk finance.

The first kind of speculator we will call an “Initiator”. If that term sounds somewhat arbitrary I want to assure you that’s only because it is. It’s totally arbitrary. I have a great name for the other kind of speculator but I had to just wing it for this one. I hope it sticks. It certainly sounds cool – you want to be an “Initiator” don’t you? Sure you do. Initiators initiate things. They take initiative. You want to be both of those things.

The other kind of speculator has a few different names. One of them is “bagholder”. Is that equally evocative? I hope so- you don’t want to be a bagholder. Bagholders are trying to sell Master of Waves for $14 on TCG Player right now and no one wants them. Bagholders are pretty upset about this because they bought Master of Waves at $15 when it was on its way to $25 and they thought they were pretty slick. They saw the price going up and thought “hey, me too!” and now they’re struggling to only lose a dollar on the hottest card of last weekend. What happened?

Well, put simply, they didn’t take the initiative. There is a theory in economics that helps us know when to buy and when to sell a card like Master of Waves that seemed like it was on its way to $40 just one short week ago. It’s the eponymous “Greater Fool Theory”

On a market gone mad

A lot of people watched the coverage of Pro Tour Dublin and thought “Wow, that Mono-Blue devotion deck looks incredible”. Thassa shot up from $12 to $25 overnight. Nightveil Specter went from bulk to $5, and Tidebinder Mage shot up from $1 to $6 at its peak. Team Starcity was all over those cards and Starcitygames.com raised their prices. When that happened, all hell broke loose on the markets. There was a sudden run on those cards. Many stores cancelled or modified orders because they didn’t want to “lose” money selling into such a price disparity. They were perfectly happy getting $1 for Tidebinder Mage 24 hours earlier, but that’s another article. Master of Waves went from $5 to $10 to $15 to $20 to $25 some places in a ridiculous frenzy of buying over a 48 hour period. If you saw that they were $20 most places and $25 others, you were smart to buy in at $12-$15 if you could, right?

And since the prices were rocketing up so quickly that many sites didn’t have time to register the increments between $5 and $20, who on earth was selling at $12-$15?

Me.

On history repeating itself

Let me explain. I watched coverage like everyone else, but while many saw the next Jund, I saw the next UW Geists. When Dark Ascension came out, Huntmaster of the Fells was not a card anyone was excited about. It seemed like a durdly werewolf that took a lot of effort to flip back and forth and it wasn’t obvious where the card fit in. At the first few events where the set was legal, the card started to prove that even a small amount of advantage in the form of a wolf and some life made the card worth playing, but at the Pro Tour, no one was talking about Huntmaster of the Fells because Jon Finkel had broken the format.

Finkel took third place with a Delver of Secrets deck that utilized Dungeon Geists, Drogskol Captain, Phantasmal Image and Lingering Souls. The Drogskol Captain kept them from being able to target your Phantasmal Image and kill it, so you could either copy their best creature or make a bunch of copies of Dungeon Geists and keep their creatures tapped forever. The deck was all anyone wanted to talk about. The prices for Phantasmal Image, Dungeon Geists and even Drogskol Captain went up precipitously.

However, the deck would not rule Standard forever as everyone had anticipated. By early March, jund midrange and other Huntmaster decks were running roughshod and Delver decks took a different tack, dropping the durdly Dungeon Geists for more spells. A deck that took a PT by storm, was designed by Jon Finkel and looked invincible was nowhere to be seen.

It was with this in mind that I watched the coverage of Pro Tour Dublin and by Saturday morning, every copy of Nightveil Specter, Tidebinder Mage and Master of Waves I had were gone.

The greater fool theory

The greater fool theory is an economic theory that says, basically, that in a situation where the price of something is not driven by its actual intrinsic value (which isn’t $5 for Master of Waves but also isn’t $20) but by expectation and speculation, irrational buyers will set the price. Therefore irrational buyers will justify purchasing at a price that is above its likely intrinsic value by theorizing that someone even more irrational will come along and buy it from them. They are buying to sell to a greater fool than they are.

There is a problem with that. You’re taking a sure thing, like Master of Waves tripling and betting on something less sure, like Master of Waves quintupling. If you bought into Master of Waves around $5 (something I didn’t think was a good idea so all my copies came from packs) you had two choices. You could sell to a fool for $15 or hope to make $20.

However, fools had a much broader range of choices. They could buy in at $10 and hope their order wasn’t cancelled (good luck). They could buy in at $15 and hope to sell to a greater fool. They could buy in at $20 and try to trade them out at $20 when they arrived. They could stay out of it entirely, and if they had any $5 copies, they could hold onto them.

Why you sell at $15

Who is buying at $5 and $10? These are the Initiators. They either predicted the trend and bought at $5 or they saw the trend beginning and bought at $10. They took initiative in recognizing potential, and they initiated the precipitation of the price with their buying activity.

Now, the easy way to answer “Why do we sell at $15?” is to simply ask “Who is buying at $15?” Bagholders, that’s who! If people were able to sell at $15 that means people were buying at $15. Now, some of those were people intending to play with the cards, and in a sense they were kind of savvy since they bought the card before it hit $20 and therefore virtually made $5. But given the card’s eventual settling at $12, they virtually lost $3. The people who weren’t intending to play with the card and who bought in at $12-$15 thought they were being smart. You probably think they were being smart, too. After all, $25 wasn’t an unreasonable goal for the card and buying a $25 at $12 is 100% profit, right?

Not so fast. Let’s bring this all full circle. It may seem like those bagholders were buying into a guaranteed 100% profit, but they were in fact banking on being able to sell to a greater fool for $25. A spec is only worth what you can actually realize when you sell it, any other numbers are purely theoretical. If there aren’t enough greater fools buying the card at $25, did you actually realize a profit? Now, the fools who bought at $15 take less of a bath when the card maintains $20-$25, that’s true. But my analysis was that the Mono-Blue devotion deck was a deck, not the deck, and therefore the hysterical high point of $20 was likely very short-term. I realize I gambled, too, but I picked a wager where my worst case scenario was that I tripled up.

In summary, it’s sometimes best to sell a card like Master of Waves that you don’t feel is going to be able to maintain its peak price for long at a price point where you have all kinds of fools buying, both greater and lesser. Don’t speculate after a card has gone up a few times hoping that it will peak at a much higher price- to do so is to fall victim to the greater fool fallacy and to be left holding the bag.

• A lot of people in the finance community are saying now is the time to buy Thoughtseize. I can’t agree. MODO redemption has not kicked in yet. MODO redemption is going to inject more copies into the market, diluting the supply. This will mitigate the demand for Thoughtseize in two ways. It will either lower the price or it will not be enough to bring it down. Injecting more copies is not going to ever bring the price up so you can only benefit by waiting. When the MODO redemption copies start to hit the market, if the price does not go down, buy. If it does, wait for it to go back up a smidge and then buy. You only benefit by waiting.
• M14 is about to be completely forgotten. Redemptions have slowed and boosters are not selling as briskly. This may be the floor for Mutavault. More mono-colored decks means people can get ballsier with their manabases and Mutavault is seeing play. This is an eternal-playable card and this is the cheapest they’re likely to be, ever. A reprint is extremely unlikely.
• I think the weapons are bad specs. Yes, I realized this after I bought a big pile of Hammer of Purphoros. Thanks for reminding me. Even as nutty as Bident is (in that one deck), it’s likely to be a 3-of max and more likely a 2-of. Couple that with it having been a giveaway card and the other weapons being in pre-cons and you have a recipe for price stagnation.

That’s all for this time. Join me next time where we’ll discuss the Keynesian Beauty Contest.