Today I want to talk about inventory management. Others here at Brainstorm Brewery have touched on this subject, but I don’t feel like it’s been explored in enough depth. I think inventory management is a glaring weakness for many financiers, so much so that I am going to dedicate a series of articles to it.
Today is an introduction to the basics—what inventory management is and why it is important. I will cover specific concepts (like inventory turnover) in detail in future articles.
Since inventory management is probably the least glamorous part of Magic finance (or any business, really), it doesn’t always make for an exciting read. I’m going to try using some common mistakes to illustrate the ideas and to make the article less dense. If these sound familiar, you can start improving right away by watching out for them. Future articles will give you more precise tools to manage your inventory.
The What and Why
The goal of Magic finance is to sell cards and make money.
The goal of Magic finance is to sell cards and make money. It’s so important I thought it was worth saying twice.
Inventory enables you to sell cards and make money. That is its only purpose. You can’t sell cards you don’t own (don’t start with the short-selling stuff, either). So the set of cards you have acquired with the intent of selling for profit is your inventory.
We are one section in and I guarantee a lot of people are already doing this wrong. How can that be?
Mistake #1: Collectionventory
Your inventory is not your collection! Your collection is not your inventory! Collecting is about stockpiling cards, finance is about stockpiling money. Big difference.
One of the true rookie mistakes is using your inventory as a measure of success. Owning more inventory does not, by itself, make you a successful financier. It doesn’t necessarily make you unsuccessful either, it’s just the wrong number to look at. The goal at the end of the day is to generate sales and cash. Even if you started with a booster box of Return to Ravnica and traded all the way up to a set of duals, you still have not produced any income and you still have no cash.
Does it feel good to spread 100 copies of [card]Sphinx’s Revelation[/card] out on your desk and post a picture on Twitter? Yes, absolutely. You are only a good financier when you sell that stuff and make a profit, though. If your inventory is increasing dramatically while your sales stay low, you are a good collector, not a good financier. The guy who pays his rent every month with his Magic profits is a good financier. It doesn’t really matter how many duals he has in his binder at any given time.
In summary of this section:
You need inventory but it’s not the goal and more doesn’t mean better.
Carrying inventory is different from collecting and you shouldn’t get attached to your stock.
Costs of Doing Business
The second thing you need to know about inventory is that it’s expensive and you wouldn’t carry it at all if you didn’t need to. Unfortunately, we just finished covering the first thing, which is that you need to carry inventory. In that regard, inventory management is very much a balancing act.
Here are the ways that inventory is costly:
Most importantly with cards, inventory ties up your money. This is money you could be earning a return on, either through Magic finance or a more traditional investment vehicle, or otherwise using for bills, food, etc. You lose flexibility and you may not be prepared to take advantage if a great deal comes along.
Mistake #2: Dead Money
Let me jump in here with an example. Many of us have had a pretty nice run with the recent Modern spikes. Financiers didn’t really need to be particularly knowledgeable or clever to get a piece of the action, since the entire format essentially corrected in price. The one thing you did need was cash. Whatever was in your binder or spec box that didn’t spike—Standard specs, EDH, Legacy, whatever—was pretty costly whether you realize it or not. You may look at your $100 [card]Scavenging Ooze[/card] spec and still think it’s solid (and it is), but if that was a $100 bill instead, you could have easily jumped on a few sets of [card]Snapcaster Mage[/card]s (or anything else), sold out for a nice profit, and now have a $150 Ooze spec instead. If it’s not making you money, it’s losing you money.
Back to the hidden costs of inventory.
Inventory can be costly to maintain. You have to sort cards, count them to make sure you aren’t missing any, track their prices, buy sleeves or boxes to hold the cards, and so on. You may find yourself putting quite a bit of time into your inventory, or worse, you may be paying someone to do these things. This one is typically not a huge concern for the part-time financier. It’s pretty easy to organize your specs while watching a TV show you planned on seeing anyway. But when you start dealing with large amounts of inventory, buying collections, etc., it’s no joke.
Finally, here’s where all the downside is hiding.
Carrying inventory comes with risk. You could lose or damage cards. They could be stolen. Cards could become obsolete if you aren’t able to sell them before they rotate or a better version is printed. They could be banned. You could buy in at the top of a speculative spike. Wizards could horribly over print Modern Masters II after the volatility this winter. In any case, your inventory could lose substantial value. With the exploding popularity of Magic, it’s hard to lose money being a financier. If it’s going to happen, though, then some version of this inventory risk is the overwhelming favorite to get you.
I’ll talk much more about how you should be tracking your inventory in subsequent articles, but I’ll leave you with this crucial, and very tempting, mistake.
Mistake #3: Ignoring Losses
Losses will kill you, as I said above. We are all inclined to shuffle these experiences to the back of our minds, but it is important that you recognize inventory-related losses. You can’t just forget about them or call it bad luck or stick them in the bad spec box. Here is an example with some numbers to illustrate:
If I buy five copies of [card]Snapcaster Mage[/card] at $20 ($100 total investment), then sell them for $30 cash each, I have $150 for a profit of $50 or 50%. Awesome, 50% is great. But if my dog chews just one of those cards up (or more likely, I confuse collecting and finance again and stick it in my cube) and I can only sell four, I have $120. My initial investment is the same $100, but now my profit is only 20%, meaning I’ve lost more than half of my profit because one-fifth of my inventory disappeared.
When you have a lot of cards you are trying to sell, this stuff will happen and you can’t ignore it. Theft, damage, specs gone horribly bad—these are risks associated with holding inventory and they eat into your profits in a big way. Inventory losses are so painful because you are not only missing out on profits, you are losing your original capital. If you are not recognizing those losses, you are probably less successful at Magic finance than you think. The temptation is to look at the four copies you did sell and conclude that you made a handsome 50% on the Snapcaster spec. However you record this stuff in your spreadsheet, your bank account is going to tell the truth.
- Inventory is necessary but costly. You want to keep the smallest possible inventory that will support your sales.
- Minimize the money you have tied up, the time you have to put in, and the risk of losing value.
Your challenge as a financier is to balance having extra inventory sitting around against missing out on sales because you don’t have the stock.
Next time, we’ll start to talk about the tools you need to do that.
Thanks for reading.
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