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Inventory Management Part IV: Sunk Cost

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This is part four of my Inventory Management series. Parts one through three are here, here, and here. Read them first if you haven’t already. I really appreciate the feedback I have been getting and I’m happy to answer questions.

Today we’re talking about sunk cost. Sunk cost is not just an inventory management topic, but a very general economic concept. The thing is, your inventory is a sunk cost. That makes it incredibly important to understand the concept if you want to effectively manage your inventory.

Sunk costs present a bit of a trap. If you aren’t familiar with this line of thinking, you may be lead into some buy and sell decisions that feel fine, but really aren’t very good.

That Sinking Feeling…

Let’s start with a definition.

A sunk cost is a cost you have already incurred and that you can’t undo, thus making it irrelevant to your decision making going forward.

The first half of that sentence is simple, the second half gives people fits.

There are two distinct decision points in each of your Magic transactions (or any transaction, because this applies very generally): the buy decision and the sell decision. Your profit is a function of both of these decisions, but the decisions themselves are made independently of each other.

Think about that for a minute. These two decisions should be totally unrelated.

When you make your buy decision you choose when to buy, how much to buy, and how much you are willing to pay. After you make this decision, it’s done and can’t be revisited. Any money you spent is now a sunk cost. That ship has sailed. You really won’t know if it was a good buy decision or a bad one until later on, but either way, there is nothing you can do about it now.

Once the buy decision is in the past, all you can focus on is the sell decision. It’s super important to realize that half the battle is over and you have to live with the results of your buy.

When all that’s left is the sell decision, all that matters is revenue. You are going to make the sell decision that gets the most money in the door, period. It doesn’t matter how much you paid. You are strictly in sales mode. If your buy decision was solid, you are in line to make some money. If your buy decision was awful, you are just trying to stop the bleeding. Either way, all you should care about at this point is getting as much money as you can for your cards.

I can’t stress this enough – you should not be looking at your buy price when you sell cards. The trap that many, many people fall into with sunk costs is letting their buy decision influence their sell decision. The first thing most people do (including me) when they are considering selling a card is look at the price they paid. It’s really a bad habit. Focus on selling, then go back and look at your buy price and see how you did.

Here are two examples to illustrate how failure to recognize a sunk cost can lead to bad decision making.

Example 1 – Profit Targets

Trader A and Trader B both buy a playset of Scavenging Ooze for $25, each thinking the card has a lot of potential for the coming Modern season. Indeed, the card increases in value substantially over the next few months.

Trader A looks around and sees that the card has leveled off at $40 for a set. Modern season is coming to a close and he thinks it is unlikely the card sees any further increases so he decides to sell at $40. He looks back at his inventory sheet and sees that he paid $25 for the set which gives him $15 profit. Nice work.

Trader B also notes that the market for his Oozes has leveled off at $40, but he (incorrectly) considers his buy price when determining his sell price. You see, Trader B has a rule of thumb that he doesn’t sell until he doubles up. He looks at the $40 price, says, “That’s not enough profit,” and holds out for $50

Trader A’s profit is $15. Trader B’s profit is $0.

Assuming they correctly identified the new stable price as $40, this was a very bad decision for Trader B. Trader A now gets to take his $40 and pick up the Theros card he thinks will be good in the new Standard (or whatever). Trader B, meanwhile, has zero cash and four Oozes that are probably not going up anymore this year and might just go down after Modern season ends.

Trader A concluded that $40 was the best he was going to do and pulled the trigger. He didn’t consider what he paid, he knew $40 was as good as it gets and went with it.

Trader B, on the other hand, made the critical error of factoring his buy price into his sell decision. The market cares not one bit about what you paid for your cards. Trader B should have realized that the buy decision on his Oozes was far in the past, meaning that cost was sunk. If he had, he would have seen that $40 was the best he was going to do and sold his cards even though he didn’t hit his target.

Now, if they decided that the Oozes were definitely going to $50 per set, the correct decision for both is to hold. Either way, it has nothing to do with what they paid, only with what they think they can get. That is the takeaway here. It is counterintuitive in business to forget about what you paid. It seems irresponsible. And it’s not that it doesn’t matter, it’s that it doesn’t matter for the sell decision. You should certainly go back and review your buy decisions before making new ones. If you are chronically overpaying for cards, yeah, that’s a problem. But it’s entirely on the buy side.

Now let’s reverse the scenario. Everything still applies:

Example 2 – Cutting Losses

Exactly as above, Trader A and Trader B both buy a playset of Scavenging Ooze for $25, thinking the card has a lot of potential for the coming Modern season. Unfortunately, this time it shows up as a reprint in the Conspiracy product and the price tanks.

Trader A looks around and sees that a set of Oozes is going for $15 and dropping steadily. Modern season is coming to a close and he thinks that even after Ooze bottoms, the reprint will hold prices down into next year. He decides to sell at $15 because he thinks it’s the best he can do. He looks back at his inventory sheet and sees that he paid $25 for the set which gives him a $10 loss. That is unfortunate.

Trader B also notes that the market for his Oozes is $15, but he (incorrectly) considers his buy price when determining his sell price. Trader B absolutely refuses to sell anything for a loss. “I’ll just wait it out,” he says.

It might be weird to think of “minimizing losses” as being synonymous with “maximizing profits,” but that’s the case here. Trader A realized that his Oozes were a sunk cost. He couldn’t undo the purchase, so he followed solid sell decision logic: get as much money as possible for his Oozes. He’s down to $15, but now he can buy Theros cards like he planned and start building that back up.

Trader B, on the other hand, has no cash and a set of Oozes that is still dropping in price. He’s going to miss the opportunities that come with rotation and the new Standard season and really has no idea when or if his Oozes will rebound, all because he was looking at his buy price when deciding whether to sell.

Keep Your Eyes On The Road

It might feel like you are wearing blinders, but you don’t want to be looking too much at the “cost” column of your inventory sheet when you are selling cards. In fact, hide it if you want—you don’t need it. Those decisions are made. Every time you look at cards already in your inventory, focus only on your sell price and timeline. How much can you get for these cards and how soon?

The vast majority of us in the financing community started as players. Have you ever pulled a box of old cards out of your collection and started flipping through them, looking for anything valuable? The only thing going through your mind is, “How much money can I get for these?” You bought those cards so long ago that you don’t remember and don’t care what you paid. You are focused solely on maximizing sales. What can I buylist? What singles should I sell now? What singles will be worth more if I hold them for a bit? Basically, how much money is in this box? This is what it feels like to truly recognize sunk cost and focus only on the sell decision.

It is very hard to train yourself to think the same way with cards you just bought. Your buy decision is so fresh in your mind. The truth is that if you buy a card the day before it gets banned, your profit-maximizing decision is to turn around and sell it the next day even if that means losing money. The most money you will ever get for that card is right now, before it tanks. It sucks that you just bought it yesterday for more, but that cost is sunk and you can’t change it.

I promise that you will make considerably better sell decisions and thus make more money if you look at your inventory as sunk cost.

In Closing

To be clear, this does not minimize the importance of tracking. Tracking still tells you how you are doing and is an absolute must. You just want to be sure to wait until after you sell the cards to look back at your buy price. Did you make money or lose money? Why? Was the decision to buy a good one or a bad one? This is where you look at cost. Then ask yourself the same thing for the sell decision. Analyze those decisions separately, not as one big transaction.

Well, I think I’m almost finished with this series. Next week I’m planning on tying up some loose ends, but I feel that the heavy lifting has been done. If anyone has any questions about inventory management, hit me up on Twitter (@acmtg), on Reddit, or in the comments here. I’d be happy to answer reader questions in the final part of the series.

Thanks for reading.

 

Read the other excellent installments in this ongoing series. 

Part 1: The Basics
Part 2: Tracking
Part 3: Turnover

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Anthony Capece

Anthony Capece

@acmtg   -    Articles
Anthony is your typical started-during-Revised-then-quit-then-came-back-years-later Magic player.He enjoys the financial aspect of the game the most, mainly because it lets him use his analytical side but also because it makes up for the money he hemorrhages drafting on MTGO.
Anthony Capece

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Anthony Capece

@acmtg   -    Articles
Anthony is your typical started-during-Revised-then-quit-then-came-back-years-later Magic player. He enjoys the financial aspect of the game the most, mainly because it lets him use his analytical side but also because it makes up for the money he hemorrhages drafting on MTGO.

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  1. Max

    As always, an awesome article. I’ll be putting a lot of this into practise when I start playing the financing game this summer.

    Thanks!

  1. Inventory Management Part V: Strategy » Brainstorm Brewery

    […] Part I: The Basics Part II: Tracking Part III: Turnover Part IV: Sunk Cost […]

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