Sunday, July 20, 2014

Opportunity Cost in MTGO investments

Hi Everyone!
Those of you who know me, know that I do a weekly video on MTGO finance. I talk a little about theory and give recommendations on cards to buy and sell. Here’s a link to episodes 1-4
If you’re interested in MTGO finance, which I assume you are because you’re reading this, the show has good recommendations and talks a little about theory .This blog will talk mostly about theory and leave out the recommendations. I think they work well together, that’s why I’m recommending the youtube show.
The real reason I mentioned my show is that people watch and learn from the show but don’t understand a core finance topic. The problem is that they say they like the advice, but do something different. Maybe they don’t really like my recommendations… Regardless, viewers say they will hold onto cards that I recommend selling.
The reason they should sell is the investing concept of opportunity cost. Opportunity cost is what is lost by forgoing the next best investment. It’s really hard to calculate opportunity cost with MTGO cards because it’s speculative and we don’t know what factors will play a role in the market. We can look back and say, “If I’d only…”, but don’t do that, you’ll go crazy and it’s easy once you have perfect information to make a decision.
One card in particular I talked about is Mana Confluence. It’s the “new City of Brass” from Theros block. I recommended selling it because it’s really high for what it is. I got a comment from one viewer in particular that they thought Mana Confluence will go up because Theros block is at its low point. While the logic is sound and the viewer may be right, Mana Confluence will probably go up. So what’s the problem, right?
Here’s the problem. When we invest in MTGO cards, we are shooting for a 200% increase in the card value over the next 12 months (I’ll talk about why in a later article). The problem with keeping Mana Confluence is that if I buy at $8 it’s certainly not going up to $24 in the next 12 months. If it does, I’ll eat my hat.
So Mana Confluence doesn’t meet the need for our 200% increase in price. What’s the alternative? Not investing the money you’d invest in Mana Confluence? It’s not really news, but money not invested doesn’t make money so you’ll have to invest in something if you’re planning to make any money.
Let’s say Mana Confluence goes up to $16. You made 100%. The opportunity cost is that you could have invested in something else that went up more. If you invested in Aegis of the Gods (a buy recommend that I got a lot of heat for) and it goes from $.05 to $.15. You’d have made 200%. The opportunity cost of investing in Mana Confluence is 200% from not investing in Aegis. When you take the gain from Mana Confluence and the opportunity cost of not investing in Aegis, you end up with -100%.
The basic idea behind opportunity cost, you have to have your money invested, and you need it to be in the best investment possible. Opportunity cost is what you can’t do because you chose to do something else.
I do want to make one last point about the people who love to just play MTGO. Opportunity cost is more than just money. You can keep your Mana Confluences and use them in your decks. The opportunity cost is that you don’t invest in other cards that let’s say make you 200%. The opportunity cost is that you’re not making 200% to play MTGO. If that’s a cost you’re willing to pay, then by all means pay the cost and enjoy the game. It’s like I always say about everything, everything has consequences. If you can live with them, go for it.

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