Today I want to talk about one of the great traps in Magic finance, or really any kind of investing. The trap is forgetting about, or just ignoring, this statement: past performance does not indicate future results. To take it to the extreme, it’s the trap of “always” and “never.”

Let’s start with an example. Take a look at the following chart, which is the price of a Revised [card]Underground Sea[/card] circa May of 2014 (just before Journey Into Nyx hit). Before you continue reading, take a few mental notes on what you see.

Here are my notes for comparison:

[card]Underground Sea[/card] has seen about a 150% gain since June of 2012.

It has not seen a meaningful decrease in price during that time.

It has recently seen a dramatic increase in price (January to May of 2014) and has not leveled off.

The last significant jump was about one year ago, in May of 2013.

That is a pretty matter-of-fact interpretation of the data. Importantly, it’s entirely focused on what the card has done in the past and doesn’t make any predictions about the future. Let’s be honest, not many of us were quite so level-headed about duals at the time.

You were much more likely to see the following comments on [card]Underground Sea[/card]’s price movement from Magic financiers last May:

[card]Underground Sea[/card] has never dropped in price meaningfully and likely never will.

Based on the current trajectory, the price will certainly climb to $400 soon and $500 eventually.

Duals now appear to have a seasonality (see May of 2013 and 2014) as people sell out of Standard in the spring and want to preserve their capital.

Reserved List cards, with duals among the most desired, are truly the only safe haven in Magic finance.

There is no ceiling.

Sea, like other duals, is a good buy at any price since they will never drop.

You might notice that these bullets are made up of observations and conclusions smashed together. The support for these conclusions comes from a false equivalency of past performance and future results. Dual lands have never gone down in price so dual lands will never go down in the future. [card]Underground Sea[/card] has increased dramatically in price so it will increase further in price.

Now let’s look at how things unfolded (if you don’t already know) and then go back and take another look at the analysis.

[card]Underground Sea[/card] (like most of the duals) has dropped by about 20 percent since May and does not appear to have leveled off.

The Mistake of Always and Never

This is not an “I told you so” article. No one that I’m aware of called for a substantial decline in the dual lands this year. I certainly did not.

This is not a “we should have seen it coming” article, either. There was every reason to think that duals would continue to climb in price based on the trend. There was nothing, at least that I can tell, that forecasted this drop. Vague statements and doomsaying like “they can’t go up forever” do not count as forecasting a 20 percent decline, either.

The mistake was turning probably into always and turning probably not into never. If you deployed money based on those equivalencies, you lost and maybe lost big.

It’s a subtle distinction on paper but a massive change to mindset. We will make drastically different investment decisions when looking at probably than we will when looking at always.

Probably calls for an investment coupled with the usual safeguards: diversification, properly sized investments, and other risk mitigators.

Always is a sure thing, a stone-cold mortal lock. Always means safeguards are not necessary, that caution can be thrown to the wind, because it is 100 percent. If you ever find one, go ahead and bet it all—no one would argue against pushing all-in when your opponent is drawing dead. Good luck finding these opportunities, if they even exist.

You really can’t afford to confuse “always” and “probably” when a lot of money is on the line.

Variance in Investing

To be clear, the correct read on that first chart (May 2014) is that Underground Sea would continue to increase in price. There was nothing to support a call for a decline or a break in the trend.

The thing is, we often forget that there is massive variance in investing in Magic, just like there is variance in the game itself. In fact, there is massive variance in any kind of investing.

You can’t solve an investment any more than you can solve a game of Magic. Perfect play loses to timely top decks from your opponent, and sometimes cards drop in price that “shouldn’t” drop or have never dropped before. You can stare at charts and spreadsheets until your eyes pop, but you will never get the variance out.

Everything indicated duals were safe and would continue to go up, but they went down instead. Are there reasons for this? Maybe. Somewhere buried in a thousand variables there might be an answer, but we are not going to solve it and we are certainly not going to predict it. Call it variance.

These things just happen. Duals always go up until they go down. At some point we may get confused and think they can’t go down. The same was true of the U.S. housing market a few years ago.

The good news is that this is all very easy to work around, at least in Magic finance. Just plan for variance in your Magic investments. You can do that in a lot of ways, but here is the executive summary: never make an investment that will break you if you lose it. It’s only really a problem if you are making large bets.

Dual lands are a great example to use here because they, more than almost any other set of cards, entice financiers to make those huge bets. You don’t have to worry about variance very much when you pick up a hundred copies of a bulk rare. Your safeguards come built in in the form of a low price. A single Underground Sea costs more than that spec, and the financiers investing in duals are buying lots of dual lands. It’s adult money.

If you have a playset of Underground Seas that you can use in a Legacy deck, big deal, they are worth less now. If you dove headfirst into Magic finance by buying $5000 in duals, well, that’s a lot tougher. It could be quite a while before you break even, let alone turn a profit.

“Always” and “never” are not words that should be in your vocabulary if you are investing serious money in Magic. Top Magic pros don’t say, “There’s only one card that beats this line but I haven’t seen it yet so he’ll never have it now.” They painstakingly play around the one card that the opponent, in all likelihood, doesn’t have in his hand or maybe even his deck because they risk losing everything if they don’t.

Invest the same way. Press yourself into finding the scenarios where you lose big and don’t dismiss any of them as too unlikely. Don’t take the shortcut of simply extending the trend line.

Upcoming Opportunities

This isn’t just a dual land thing. I see it elsewhere in Magic finance. Here is a short list of investments where I regularly see people turning probably into always. If you are thinking about putting real money into one of these, be sure you aren’t making assumptions.

1) Sealed Product – Many people did well holding sealed product during the Magic boom. That has morphed into the perception that sealed product always goes up, always gives you a good return, and never drops.

Avoid This Mistake: Don’t be the one with a closet full of recent booster boxes when the paradigm on sealed product changes. Eventually it will—there are already cracks in the foundation.

2) Modern Masters 2015 – Whatever you think you know about this set, forget it. In fact, forget it is even called Modern Masters because it will behave radically different than its predecessor. Forget what you think you know about the cards that will be included and what it will do to their price.

Avoid This Mistake: Don’t empty your checking account for [card]Tarmogoyf[/card]s and other Modern Masters reprints if they show up in MM2015 and dip in price. Yes, they spiked majorly after the first reprint and turned out to be a great buy, but you are working with one data point. A repeat is far from a given, and this really could be the time that Goyfs go down and stay down.

3) Legacy Staples – If I asked every reader of this article what dual lands are going to do next, I bet some of them would say, “Duals are going back up because duals always go up.” Re-read the article. Maybe [card]Underground Sea[/card] bounces, maybe it drops another 10 percent.

Avoid This Mistake: Don’t assume that a 20 percent drop eliminates the risk from buying duals and make the same mistake this article is about by plowing all your money into them now. It very well could be a buying opportunity ([card]Volcanic Island[/card] is already ticking up) but a deeper decline is not impossible, so please use caution. Make sure your buys are appropriately sized and you are not overextending.

That’s all I have for today. You can find me on Twitter at @acmtg if you have any questions or just want to discuss Magic finance.

Thanks for reading.