Finance 201: Putting Theory to Practice

For the purpose of this article, I will be using fictional card prices that may or may not reflect the current prices as of the date this article is written or released. All prices quoted are in US dollars.

As a Magic: The Gathering financier, you likely hold a substantial number of cardboard Magic cards. But how do you properly register the value of your collection? How do you determine the profit per card, and how can you avoid getting confused by all the historical numbers, price changes, trades, or whatever else might distort your price memory? That, my fellow entrepreneurs, is all a matter of proper bookkeeping, and I am here to help you with your ABCs.

The Price Basis: A Historic Price System

In order for a company (or our little enterprises) to express their assets in monetary values, one must settle on a price basis. The most commonly used price basis is the price of purchase. That means that with the price of purchase as price basis, our valuation of our assets happens at the moment of purchase for the actual value that you have paid for that asset.

For example, Jason has saved up $100 and starts his own little venture in Magic: The Gathering finance named “Alt F4.” On January 1, he purchased 40 copies of [card]Rattleclaw Mystic[/card] at $2.50.

Balance Sheet January 1 Alt F4

Debit Credit
Inventory Equity $100
Rattleclaw Mystic 40 X $2.50 $100
Total $100 Total $100

This is a very simple way of showing what the value is of Jason’s assets. Here Jason has only a single product, Rattleclaw Mystic, all purchased together for the same price per copy. This, for us Magic: The Gathering financiers, is not all that representative of how we acquire our assets. In this article, we will follow Jason as he acquires his assets in all sort of different fashions and how that reflects on his balance sheet. In the following year, only a single relevant event occurs. On June 1, Jason sells 20 copies for $4 a piece. For the purpose of these examples, other costs are disregarded. The profit of this year will be calculated as follows:

Balance Sheet December 31st Alt F4

Debet Credit
Inventory Equity $100
Rattleclaw Mystic 20X $2.50 $50 Profit $30
Cash                         20X $4.00 $80
Total $130 Total $130

Income Statement Alt F4

Sales: 20 X $4 $80
Cost of goods sold 20 X $2.50 -$50
Profit $30

The example above shows the essence of profit calculating using the price of purchase as price basis. From here on out, I will elaborate on the following subjects relevant to Magic: The Gathering finance working off this concept in the following weeks:

  • How to incorporate trading
  • Purchase of same goods in different batches (with different prices of purchase) (next article!)
  • Price drops (next article!)

The Basics of Trading: 201

Equal trades

For most of us, most of our assets comes from acquiring cards by trading for them with our own cards. The concept of trading is ancient: I give you something you need in exchange for something I need. Back in those days, any item or service worth anything to anyone was a virtual currency. However, not everyone had something the other person wanted. That’s when the coin was introduced, an item that represents value. The real currency.

Trade goods Practical value Virtual currecy
Money Virtual value Practical currency

If we want to determine the value of a traded card properly, we need to imagine we are taking an extra step between the trades: exchanging the cards for money. Once you realize that you are actually selling your goods for money, then using that money to purchase someone else’s goods, then you can safely use the price basis of price of purchase.

To determine how much imaginary money is being exchanged, you need to have a baseline way to evaluate prices. Pick a single source for yourself and stick to it. I don’t care what source you use to actually facilitate the trade, as long as you always use the same source for when you determine the value that you are going use to register your cards. Because your source determines what price you theoretically paid for your assets, you must choose your source responsibly. The cheaper the source is comparatively, the more profit you appear to make. If your source’s prices are too high, it might appear as though you’re making no profit at all!

Example: Corbin is visiting a local grand prix and has a binder full of cards. He stumbles across another player named Ryan and they both settle on a trade. Corbin notes the cards he has traded and checks his chosen source, StarCityGames.com, to evaluate the purchased goods and his sold goods. We will assume that Corbin valued his [card]Giant Shark[/card] for $5 on his balance sheet. Corbin has traded his $5 [card]Giant Shark[/card] for Ryan’s two $2.50 [card]Shambleshark[/card].

In theory, this means that Corbin sells his Giant Shark for $5 and then purchases two Shamblesharks for $2.50$ each. That’s an even trade with an even value, at least according to Corbin’s source. That’s an easy one. Let’s assume that this is the only thing Corbin does the entire year.

Balance Sheet December 31st Corbin’s Cabin

Debet Credit
Inventory Equity $50
Giant Shark      9 X $5 $45
Shambleshark  2 X $2.50 $5
Total $50 Total $50

Income Statement Corbin’s Cabin

Sales: 1 X $5 $5
Cost of goods sold 1 X $5 -$5
Profit 0$

As you can see, an even trade results in no profit made. Now let’s see what happens if Corbin trades in his favor at the moment of his purchase.

Profitable Trades with Single Cards

“That means that with the price of purchase as price basis, our valuation of our assets happens at the moment of purchase for the actual value that you have paid for that asset.” This time, Corbin avoided Ryan completely and instead encountered Marcel. Marcel also wants to trade Corbin for his Giant Shark and Marcel insists on using a price source that results in the following numbers according to Corbin’s price source: Corbin trades his $5 [card]Giant Shark[/card] for four of Marcel’s $2 [card]Stinkweed Imp[/card]s.

This trade seems to be in Corbin’s favor: Corbin’s $5 versus Marcel’s $8. That seems easy—a profit of $3, right? Well, that’s not how it works. Let’s take another look. What truly happens is that Corbin sells his Giant Shark for $5 and purchases four Stinkweed Imps for $5. ($1.25 / piece). Again, no other relevant events occur during the year.

Balance Sheet December 31st Corbin’s Cabin

Debet Credit
Inventory Equity 50$
Giant Shark      9 X 5$ 45$
Stinkweed Imp  4 X 1.25$ 5$
Total 50$ Total 50$

Income Statement Corbin’s Cabin

Sales: 1 X 5$  5$
Cost of goods sold 1 X 5$ -5$
Profit 0$

In practice, Corbin simply traded for no profit, selling an asset to purchase another asset. Remember, the price that we value it as is the price of purchase, so that is why it seems like we made no profit. Profit only happens once we are able to sell our Stinkweed Imps.

Instead, let’s assume that after Corbin traded with Marcel, one relevant event occurred. He sold four copies of Stinkweed Imp for $2 a piece to a customer.

Balance Sheet December 31st Corbin’s Cabin

Debet Credit
Inventory Equity $50
Giant Shark      9 X $5 $45
Cash                  4 X $2 $8 Profit $3
Total $50 Total $50

Income Statement Corbin’s Cabin

Sales: 1 X $5, 4 x $2 $13
Cost of goods sold 1 X $5, 4 x $1.25 -$10
Profit $3

I split the cards out in the income statement to create clarity for the reader. Usually, the accumulated sales and costs of goods sold are clumped together, considering there are usually over a thousand per year, even for a small company.

As you can see, the profit is only acknowledged when Corbin actually sells the cards. And unlike some other Magic financiers, Corbin can clearly see what his profit margins were because he used the price of purchase when he did his bookkeeping. The important lesson to be learned here is that profit is generated through sales, not through purchases. When you trade for a card, you are in fact purchasing.

Profitable Purchase =/= Profit

(The clue is in the word: profitable.)

Profitable Trades with Multiple Cards

When you make a trade where you acquire more than a single card and the trade is not equal according to your source, the way to determine the value for each card is a little trickier to evaluate. This is where your baseline source is key.

Corbin makes another trade. Corbin trades his 5$ Giant Shark for Raymond’s $6 [card]Lightning Bolt[/card] and his $4 [card]Merfolk of the Pearl Trident[/card]. You can’t simply value the Lightning Bolt at $6 and the Merfolk of the Pearl Trident at $4. After all, you only paid $5 for them, so according to the price of purchase, both should equate to $5. This means we should make the values proportional. The total cited value of the cards according to Corbin’s source is $10. We need to decide what percentage of that $10 is Lightning Bolt and what percentage is Merfolk of the Pearl Trident. The formula is as follows: cited value of single card / total cited value X 100%.

Lightning Bolt: $6 / $10 *100 = 60%

Merfolk of the Pearl Trident: 4$ / 10$ * 100 = 40%.

Now we know what the individual cards are in relation to the total amount, we can easily determine their price of purchase value.

Lightning Bolt: 5$ * 0.6 (60%) = $3

Merfolk of the Pearl Trident: 5$ * 0.4 (40%) = $2

Balance Sheet December 31st Corbin’s Cabin

Debet Credit
Inventory Equity $50
Giant Shark      9 X $5 $45
Lightning Bolt  1 X $3 $3
Merfolk of the Pearl Trident 1 X $2 $2
Total $50 Total $50

And that’s how it looks on the balance sheet after you’ve properly deduced the value of each card.

There is a lot of ground left to cover, but it’s best to let this sink in first.

Practicing

I highly suggest practicing with these methods.

Start off small: make a new imaginary company where you slowly incorporate each new card acquired. Your inventory is your current trade binder. Odds are you don’t remember what you paid for those cards in the past. Use the naïve method to determine the value of your cards (assets)—assume you paid for them in the past what you would pay for them now, according to your cited source. This way you are not incidentally making a profit where there is none.

Summary

A trade consists of the sales of your own assets for virtual cash, followed by purchasing assets with the amount of cash generated. The value of your purchased assets are equal to the amount of virtual cash you spent on them, proportionally to the value cited by your source.

Stick to one source. Simple value any card you acquired in the past for the value of your source as if you were to purchase it.

Be consistent. Practice. Practice. Practice.

See you all next article, where we will delve into purchasing similar (same) goods at different prices, as well as what happens if a price drops!

About the Author
@TheMeddlingMage     -     Email     -     Articles Sander van der Zee is an industrial engineering student who specializes in lean-thinking. He stepped back into Magic in 2009 after a three-year break. Picking back up the pieces, he developed an interest in the financial, technical, and community sides of the game.

10 comments on Finance 201: Putting Theory to Practice

  1. Jason Alt says:

    This is next level. People are going to get a goddamn nosebleed reading this, but they’ll be better financiers for it if they stick with it.

    1. Bro says:

      It’s not next level, it’s basic accounting and spreadsheet usage

      1. Douglas Johnson says:

        What’s “basic” to one person isn’t necessarily true for someone else.

        1. Bro says:

          Useful reply bro

  2. Vale-Tech Industries says:

    Great article. I have been wondering how to handle cards that I trade for. I typically enter them into my inventory at whatever cash price I would have paid.

  3. Matt says:

    I absolutely cannot wait for the followups. This is something that has interested me for quite a time.

  4. Mason says:

    As a total newb to this whole finance game, this is really helpful. I have only now just started keeping a spreadsheet of my inventory and sales. Because I have never taken a class in finance or accounting, I have no idea how to keep a tidy and well organized spread sheet. Are there any resources that anyone can recommend to show me how to best organize mine?

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