Investing in Collectibles - Is it dumb?
Since around 2018 I’ve been studying the question of investing some portion of my income into Magic: The Gathering cards.
These things.
Magic was the very first “collectible card game”. It combined the idea of inserting rare chase cards ( like Sports cards were doing ) with using these cards to actually play games. The cards come in randomized 15 card packs and so the more of these you buy, the better your deck could become.
That creates an obvious incentive to buy a ton of cards and the game’s creators absolutely did not anticipate that people would spend so much money on their game. As a result they just couldn’t keep up with the demand for the first few years and so 1993-1994 era cards are very under-printed compared to how large the later print runs were for these cards.
Sealed Product.
Every few months WOTC comes out with new cards and packages these in factory-sealed boxes, called “booster boxes”. Once the print run of that current set is done, that’s it.
Individual cards can get reprinted in later sets, but “booster boxes” themselves are always forever in limited supply. They don’t reprint sets. This functions like wine vintages. Once you drink all the wine from 2010, that’s it. Nobody can make more. It’s gone forever. Each bottle you drink never comes back. As a result, over time, the supply only goes down and this obviously is very conductive to prices going up.
Rudy ( AlphaInvestments ) on Youtube publicized in 2016 that if you just buy these “booster boxes” towards the end of their production run and then sit on them, they invariably outperform the stock market.
I did the math in 2021:
Remember these are YEARLY RETURNS which compound over time.
$100 that you put into some of those MTG products in 1994 at 25% is $80 000 in 2021 vs just $1600 at the standard 10.5% market return of index investing.
”Just” over 2.5x the growth rate yields 50x the capital after a quarter century. So any bonus you can get above that 10.5% makes a giant difference over your lifetime.
However you can see this trend stop in 2012. I did not do the math on “dollar cos averaging” approach of this, i.e. just mindlessly buying 10 of every box, for instance, hoping the hits will cancel the misses.
What about single cards?
In this game each player makes a “deck” composed of single cards to try and beat the other player’s deck. Some cards are better than others and so, worth more money since people need them to play. Magic was the first game of its kind.
But can’t they get reprinted? Yes. Many cards in the game’s history have been worth some money at times but eventually get reprinted enough that their value just can’t be maintained.
Enter the “reserved list”. In 1995 the company reprinted many key cards that used to be worth a lot of money. This made people angry because it threatened the value of any magic card. It sucks if you just bought something for $50 and next week the company prints thousands more of that card and tanks the price to $5. You’re no longer playing a “collectible” card game, just a card game.
Since your game isn’t very “collectible” anymore if you keep reprinting anything of value, Wizard of the Coast created a list of cards which WOULD NEVER BE REPRINTED.
So, big brain idea: What if you JUST bought THOSE CARDS?
Almost without fail, these cards have destroyed the SP500. Despite constant claims of “the easy money is gone”, it mostly doesn’t matter if you bought into the market in 1993, 1999, 2005, 2010 etc. They pretty much eventually always catch up and beat index investing and this is with over 25 years of data.
Why do Collectibles have Value?
Because humans form emotional connections with objects. People will pay $50 for pants but $50 000 for “Pants worn by Elvis”.
When something creates that emotional connection while also being scarce, it becomes valuable. As an investor it’s your job to attempt to guess if some object fits into that category.
So Which Magic Cards are the Collectible Ones?
Sealed product ( older the better ), Reserved List cards, Rares from the 1993/1994 sets and most Foil cards up to about 2003.
Method: I checked the 2010 market price of these cards on MTGoldfish and compared it to the lower end of Cardkingdom’s buylist. That gives you a very conservative estimate of return rates for these categories. As you can see a lot of them completely demolish the stock market. We are talking about hundreds of different single cards here, not just a tiny few outliers.
What’s the purple? That’s called “The Timmy Zone”. That’s what happens if you picked up a Reserved List card that nobody used to play with and that card suddenly becomes useful to players. Now you see your 50 cent card shoot up to 30$ overnight. That’s why people tend to hoard Reserved List cards: They cannot be reprinted so if someone ever finds a use for it, your penny stock investment pays off massively.
As you also see from this spreadsheet, Alpha, magic’s very first ( and rarest ) edition is really always the thing you should have been buying. Interestingly the bad cards did just as well as the good ones.
Buy and hold or flip?
Flipping ( i.e. buy low sell high ) is the rookie mistake everyone makes, however the risk and time involved in doing this is likely to yield a much lower return than just working at Taco Bell. Do it if you enjoy it but it’s not an “investment” it’s a crappy job.
What are the pros and cons of investing in Magic?
Pros:
Making money with a thing you enjoy is way more fun than looking at some number in the bank.
Has beaten index investing for 25 years.
Can be completely “off the books” and as such protects you from predatory taxation/regulation/seizures. Homes can be seized, banks accounts can be frozen and retirement accounts can be taxed arbitrarily at any time. Cards? What cards? I don’t have cards. Lost them in a boating accident.
Cons:
Pieces of cardboard generate no actual value like a stock. The value of your investment depends largely on popular opinion of said investment.
You need a decent amount of knowledge of what you are doing when buying and selling.
More time consuming than just clicking a “send order” button in your brokerage account.
No tax benefits, deductions or loopholes in most countries for collectibles.
Susceptible to theft, loss and disasters. This can cause constant stress or require extra home insurance.
Not much protection if you get scammed buying/selling.
A case study:
This is an Unlimited Mox Jet, from 1993.
In 1999 it retailed for around $100, now, in 2022, $8900.
By comparison, 23 years of market returns at 10.5% would only be $1107.
So I get 9x my money right?
Case 1: Buy from store, sell to store.
$8900 is what the store is selling it for. You’re not a store. The store will offer you a measly $4450 for the same card. However this is 100% safe and takes zero time. Click the button and ship the card and they will not screw you and you pocket a profit of $4350, still 4x what index investing got you.
But whoops, capital gains tax on collectible can be anywhere from 5-30%. So now that $4350 is down to $3500. STILL BEATING STOCKS.
But again, whoops: There’s tax benefits for investing in stocks. Depending on your income, that $100 you invested might have saved you $10 in taxes. So the $100 you spent on the card would really be more like $110 you could have put in the stocks.
Still, however, that yields just $1200. You’re still way ahead, having tripled your money vs stocks.
Case 2: Buy local, sell local.
The better option is to use local marketplace apps/sites to buy and sell. First off, you get a discount on the purchase. Maybe you’d pay $75 for that $100 retail. That means in reality, if you spent $100, you’d get 1.33 Mox Jets.
Then when selling, again, instead of getting 50% value, you’d get 70%. So instead of 50% of 1 card, you get 70% of 1.33 card.
Instead of netting $4350 or $3500 you’re netting over $8100!
Is this 20/20 Hinsight?
Partly, yes. In 1999 nobody had any way to possibly guess that buying this $100 card would be worth 90x the money later. There were hundreds of other collectible things you could have bought back then that didn’t even go up in value. Here’s some I bought:
This was worth $100 in 1999 and it’s pretty much worth $100 today. Would YOU have guessed that the super popular game based on Star Wars would go broke?
What makes me confident in Magic is that it has 25 years of constant growth and very solid real organic demand from collectors who were too young in the 1990s to afford all the good cards but who are now in their 30s and 40s and able to dump massive amounts of money into this nostalgia orgy.
The people who buy these cards are people who care about the actual game and not some movie or video game and it’s people who are ready to hold FOR THE LONG TERM if not FOREVER. If you’re an investor, that’s REAL GOOD FOR YOU.
Projecting into the future…
So stocks go up at a conservative 6% inflation-adjusted rate. What’s MTG going to be worth in my lifetime if it keeps up with the markets?
Well a Black Lotus, MTG’s flagship card, retails around 25k now.
In 10 years that’s 45k and in 30, 150k.
In 1993 that card was worth nothing. In 1994 it was worth a used Super Nintendo game. By 1999 it was worth a Playstation 2. By 2010, as much as a nice couch. In 2015, it was now worth a used car. Now? A newer…. used car…
And just for fun, in another 30 years, it could be worth anywhere from $200 000 to $500 000, inflation-adjusted. That’s right: Something I could have traded for a pack of gum as a kid could buy me a nice condo and all I did was stick it in my pocket for 60 years.
Ok so how many “Magics” do I buy? It sounds foolproof!
Never forget that, despite all of these stellar numbers and this long track record of solid growth, nobody can predict the future and, at the end of the day, a collectible is not a productive asset. You are holding a little piece of cardboard that derives almost 100% of its value from being rare and irrationally desired by rich nerds.
If you did not grow up with this game and have no interest in it, it is not a good investment simply due to the work you will have to put in to acquire enough knowledge not to get scammed. Your time and effort will be much better rewarded with real estate investing.
But if you’re someone who loves any other kind of collectible, maybe look more closely into it. Magic is a great example that some of these asset classes can have dumb good returns for really long stretches of time.