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Some Thoughts on Riskier Investments
A good friend of mine has about 25% of his net worth tied up in Magic: the Gathering cards. He buys and sells them somewhat frequently, usually buying them privately from people for cash and then selling individual cards from time to time on eBay.
He estimated recently that he had approximately $40,000 in cash value in Magic: the Gathering cards should he liquidate everything today. He believes he has made a small profit on them, overcoming the mistakes he made in investing early on, and should have a good return going forward.
Now, let’s be clear: Magic: the Gathering cards are a risky investment. To understand why, let me explain a bit of what Magic: the Gathering is.
Magic: the Gathering is a game system made by Hasbro that generates about $250 million in direct revenue for Hasbro each year. The vast majority of that revenue comes from selling packs of trading cards with unknown contents, which can be used to play a rather intellectually challenging game. The cards themselves have varying rarities – some are common, some are very rare – and they also have differing impacts on the game – some are weak and some have a great impact.
Naturally, with a game that can generate that kind of revenue, there are a lot of people who play it. Those players tend to desire the individual cards that are both impactful on the game and are also very rare and will pay a significant premium for those cards. This market sustains a lot of smaller game stores and comic book shops in local communities around the world, but particularly in the United States. If you live in a town with more than 25,000 people, there’s likely a store in your town that sells Magic: the Gathering packs and single cards.
There are three big risks with investing in these cards.
First, the cards only retain their value if the game remains popular. As you can see in the linked article above, Magic seems to be gaining in popularity and has been in continuous existence for almost 25 years.
Second, individual cards are sometimes reprinted, which decreases their rarity significantly and thus decreases their value.
Third, individual cards are often superseded by “better” cards that are printed in later years, which decreases the value of the earlier cards (of course, the reverse can happen, where later cards are not as strong or are very synergistic toward earlier cards, driving up the individual value of earlier cards).
What does all of that mean? Investing in Magic: the Gathering cards is very volatile and is subject to at least some degree of risk of a total market collapse. That’s just the nature of the beast. It’s risky.
You can say almost the exact same thing about investing in any type of collectible. In the late 1990s, many people invested in Beanie Babies, which had many of the same elements as Magic: the Gathering, with differing rarities, a risk of reprinting, and a significant risk of a major market collapse. When that market collapse eventually happened, people found themselves with piles of Beanie Babies that were worth very little, even if they were “rare” ones.
Personally, I’ve invested in vintage baseball cards in the past. I particularly enjoy cards from the 1930s printed by Goudey Gum, but have also collected earlier tobacco cards and later issuings from Topps, particularly their late 1950s and 1960s sets. These investments have appreciated in value over time, albeit fairly slowly.
So, why would someone ever invest in these risky things? There are several reasons – here are a few key ones.
First, they get some degree of secondary enjoyment out of the thing they’re investing in. For example, a Magic: the Gathering investor might also enjoy the game or the aesthetic or artistic appeal of the cards themselves. A Beanie Baby collector may have received some aesthetic appeal from the cute stuffed animals. I know a person who invests in pre-1933 gold and deeply enjoys the aesthetics of those beautiful old coins.
Personally, I get a ton of value out of looking at the few vintage baseball cards I still have (I sold off most of my collection in 2006). I love browsing through them and admiring the designs of vintage baseball cards, particularly the Goudey Gum cards of the 1930s. I get pleasure from those cards that goes beyond the investment value of such cards.
The enjoyment that investors can get from those items has real value. It brings joy into their lives while investing.
Second, investments with huge risks often offer huge returns. My Magic: the Gathering investor friend reports that he has invested in individual cards (usually in multiples) that have quadrupled in value in a week or less. He owns several cards that he bought for less than $100 about 20 years ago that are now worth thousands. He estimates a 20% annual return over 20 years on some of his oldest investments.
Unfortunately, vintage baseball cards are showing the opposite phenomenon. While they are mostly holding their value, their prices are slowly declining over time (in real dollars – the sticker prices are mostly steady, but inflation is working against them). I have been able to acquire a few vintage cards extremely cheaply, but those were mostly just a good buying opportunity, not a good “holding” investment.
What about my friend with the gold coins? One only has to look at this 100 year historical chart to see that there have been times where the value has skyrocketed and other times where the floor has just fallen out of the price. There are periods where he could have earned a huge return in a short period.
Third, they feel as though they bring domain knowledge to the investment, like a person investing in stocks with a bit of “inside information.” My card collecting friend knows an absurd amount about the ins and outs of changes in the Magic: the Gathering market. My friend with the gold coins is a veritable encyclopedia of information about gold coins and the gold market. I know incredible amounts of trivia about 1930s baseball cards and what’s going on in the pricing of those cards.
Almost universally, that knowledge gives at least a little bit of an advantage in terms of making money on those investments. We have a strong sense of when to buy, a strong sense of when to sell, and a strong sense of when to just hold onto things because we know the nuances of the market really well.
Naturally, these markets are substantially less complicated than, say, the stock market, so one person can actually have adequate market knowledge to have an “edge,” whereas that’s basically impossible in the stock market without insider information.
The real question you’re probably asking yourself is whether there’s a safe way to invest in such risky things. What sort of guidelines do you follow?
Here are three guidelines I recommend if you’re considering investing in something highly risky, like precious metals, collectibles, or business angel investing.
One, don’t invest anything you’re not comfortable completely losing. If losing that money that you’ve invested would put you in any sort of financial difficulty, don’t invest. Don’t even think about it. This should be money that, if it were to completely vanish, wouldn’t upset your life. You’ve got to be able to tolerate a huge loss.
Two, don’t invest more than 10% of your total investing money into anything risky. That way, if you take a total loss, your overall investments are only dropping 10% at most. A solid year in the stock market can easily counterbalance that. Basically, you just want to make sure that a disaster in your risky investment doesn’t sink your net worth.
Three, never, ever invest in anything risky if you plan to just buy-and-hold. This type of investment only really works if you buy and sell due to constant changes in the market. A baseball player dies or is elected to the Hall of Fame? It’s a good time to sell their card. A new Magic: the Gathering release comes on the market? Look for how this affects older cards and buy and sell them appropriately. Economic news indicating a spike in inflation down the road? You may want to buy some gold.
In other words, risky investing requires you to pay attention or else it’s basically gambling with poor odds.
For me, at least, risky investing only really makes sense if you have additional interest in whatever you’re investing in. If you don’t care about it, you’re not going to obtain the extra knowledge needed to succeed and you’re not going to invest the time to know when to buy and sell. You’re also going to miss out on the additional pleasure that such investments can bring to you.
Risky investments are okay as long as you know the risk and don’t expose your future to too much risk. If you do that, you’re begging for disaster.