Welcome back to the second installment of the SCAA Newsletter. If you missed last week’s introduction post, check it out here or through my Twitter profile.
Before getting started, I wanted to flag one tweet that I thought was particularly important for anyone in sports cards. I by no means have all of the answers when it comes to investing in sports cards. This forum is about combining investing and collecting concepts that I’ve picked up throughout my life into a package that enables you to think about cards as a component of your portfolio more clearly. Some of you may have experiences and opinions that run directly against mine - that’s good (and I want to hear about them). Discussing those differences pushes the conversation farther than any single person can take it and allows us all to learn more from the process.
The theme for this week is thinking about investing in terms of risk. The key thought that should always be at the forefront of your mind when evaluating investments is that “returns are a compensation for risk.” Referencing back to Econ 101, if an investment opportunity offers a return without any risk, then that opportunity’s price would get bid down by additional investors trying to get access to those risk-free returns until the opportunity’s return profile is commensurate with its risk profile (in this case, the returns would be 0). On the opposite side, if there is very little return potential, but a high degree of risk, no one would buy into that investment until the price is lowered to allow for potential returns that are in line with that degree of risk. The sports card market might actually violate some of the underlying assumptions for the scenarios above to be true in their purest forms (i.e. there can be informational asymmetry between buyer and seller, etc.), but the concept still holds true and is a crucial component of your investment strategy.
Types of risk
When applying this concept to sports cards, it is important to first outline the key types of risk that exist for a particular card. This list below covers a few of the most important concepts, and should allow you to build upon it to think about additional risk factors that affect cards you are looking at.
Player performance - For modern cards, this risk factor is the most obvious, but is also the most important. Mark Cuban’s quote of “60% of a watermelon is better than 100% of a grape” is the concept to keep in mind here. Applied to cards, “100% of a grape” would equate to a nicer rookie card (PSA 10, numbered to 25) of a player who fails to develop into a solid performer, while “60% of a watermelon” would be a worse rookie card (PSA 9, numbered to 250) of a player who becomes all-star. Picking players well is what makes money.
In a vast majority of situations, if you are going to get one variable right among the countless factors that contribute to the future price of every card, this is the one. This is why every card investment has to start with thorough due diligence on the player, what outcomes are currently priced into his cards, what his key risk factors are, and the delta you view between his current price and what his price could be in the future.
That last point, the delta, is what this entire investing process all comes down to. It is not all about finding the next Giannis, Mahomes, or Trout every time. It is about finding the players who are going to have the highest delta between their current price and future price, even if that means someone goes from being a benchwarmer to being a solid young starter.
One case study in this concept is looking at Ja Morant versus Devonte’ Graham. Morant was the #2 pick in the draft last year and is thought by many to be a future superstar in the league. Graham was a second round pick two years ago who barely played as a rookie on the Hornets in 2018-19. Last season, both players put up roughly the same stats in terms of points and assists per game (Morant & Graham; disclaimer - I know this is an antiquated way to compare players, but I am keeping it simple for the sake of the narrative).
For Morant, this performance earned him the Rookie of the Year award and for Graham, this earned him a top 5 spot in voting for the Most Improved Player award. The reason Morant’s cards are materially more expensive than Graham’s at the moment, despite their somewhat similar performance last year, is because of the expectation of future performance priced into Morant. Those expectations of superstar status and All-NBA team selections are what lead to his cards being so expensive, not his past performance. For Graham, future expectations are much more limited. His cards saw a major bump in value during last season, but even with his past improvement, collectors don’t know how much more he can really improve from here.
With that in mind, these two players could represent equally strong investments, despite those returns being achieved due to very different future outcomes. For Morant, this could mean he becomes an MVP and his current prices prove to be not only justified, but cheap, while for Graham, he could yield strong returns for his investors if he improves again this season and the Hornets make the playoffs as an 8-seed with him leading the team in scoring.
It is intuitively obvious why Ja Morant has more expensive cards than Devonte’ Graham, but working to establish what performance is needed out of players you are buying cards of in order to yield future gains is crucial to the evaluation process. In this context, it is not about the future performance on an absolute level - it is about the difference between that future performance and what expectations are currently priced into that player’s cards.
Ungraded cards / condition - Ungraded cards come with a great deal of risk. For this reason, when selling investment-grade cards, you should be selling card that are graded. This removes uncertainty for prospective buyers about damage that you can’t see through pictures online, the card’s authenticity, or any possible alterations. Any of those can kill a card’s value and the entire point of grading is so collectors can transact with each other using symmetric information in terms of the condition of the card, rather than relying on an eBay description and fuzzy pictures to dictate how much someone should spend.
For vintage cards, the biggest risk to mitigate with grading is authenticity. For older cards, I don’t buy ungraded cards because there is a higher chance than I am willing to accept that the card could be a counterfeit, especially if you are dealing with Hall of Fame players in popular sets such as t206, 1933 Goudey, or 1952 Topps.
For modern cards, the situation is slightly different. As mentioned in my previous post, getting an extremely high grade is the expectation for newer cards given the amount of care that collectors put into protecting their collections nowadays. Because of that high bar, the value of sub-par graded items decreases dramatically. What a “high grade” or “low grade” is can differ from card-to-card, but generally speaking, for modern cards you should be looking for 9’s or above.
A example is the Trae Young 2018 Prizm RC. Recent eBay sale price / PSA pop report are as follows:
There are two things to note in this case. Firstly, a PSA 10 is the most common grade. Because of that, a PSA 10 for this card is less a representation of exceptional condition and more a representation of “par for the course.” That doesn’t mean that PSA 9’s or 8’s aren’t worthwhile to consider investing in - it just means you have to be aware of the fact that a PSA 10 is somewhat the norm for the card and that you are taking a deduction in quality from the most common grade by buying an 8 or 9.
Secondly, note the dramatic increase between the deltas in price from PSA 8 -> PSA 9 and from PSA 9 -> PSA 10. To me, this shows the material bump in collector interest for 10’s, despite the lack of scarcity for 10’s among the graded population (I tweeted about something relatively similar about scarcity vs. price this week in the context of the t206 Ty Cobb set). In this case, collectors seem to view anything below a 10 as materially less desirable due to the amount of 10’s that are out there.
With that context, the most expensive ungraded version of this card sold for $145 a few days ago, with a couple others going for closer to $100 as well. Given that the cheapest non membership-based PSA grading option at the moment is $50 per card, you would now be into the card $195 to just have a graded version of the card. At that point, you must get a PSA 10 in order to come in ahead on this transaction. If you get a PSA 9 in the grading process, you would have been better off paying less money and removing all risk in this regard by just buying a graded PSA 9 in the first place for $160.
Conversely, there have been times when I have purchased raw modern cards on eBay, gotten them graded, and have come out ahead because they received higher-than-expected grades, which gave me more pricing power when selling due to relative scarcity. The important thing here is just to know what risk you are accepting when making ungraded purchases - it is all about picking your battles.
Time - How long does your investment thesis need to play out? Time is expensive and every dollar you put towards one player is a dollar that can’t go to a different one. We will get more into how to track performance in a way that factors in time in the future, but the key takeaway for now is the longer you need to wait (and the more things that need to go right over that timeframe), the more you need to be compensated with potential returns.
An example here is Noah Song - a top pitching prospect for the Red Sox. He has had incredible amateur and professional careers so far, but he is a graduate of the Naval Academy and has been instructed to attend Naval flight school, putting a pause on his baseball career. When evaluating getting cards of his, you not only have to factor in the normal risk that comes with young pitchers, but also you must factor in the reality that it might not be until 2022 before he resumes his baseball career and it would likely be a couple more seasons beyond that before he is able to fully make his way through the minor leagues, even if everything goes right for him on the field. The risk here is that if I get a card of his, could I not have found another player with a similar upside who could reach it in a shorter period of time?
Combining types of risk
As mentioned before, for every card, there are many types of risk that factor into its future price. Knowing how each card’s combination of risk factors works together is the next step to making smart investment decisions.
One example for me is that I rarely buy ungraded baseball cards of players in the early stages of the minors. I am already accepting so much uncertainty about the future performance of the player in that investment, that I have little interest in adding the additional risk of possibly having the card’s grade later come back lower-than-expected. It would be very disappointing to be correct about the future success of the player’s performance, wait a couple of years for a player to reach success in the major leagues, and then not be able to fully participate in that upside because of a poor grade on a card I initially bought raw. I would much rather pay a little more on the front end for a graded version of the player’s card that I have high conviction in and be able to fully participate in the future success of that player if I do prove to be correct in the future.
That is just one example of many (including the one cited above about my unwillingness to accept “ungraded” risk with vintage cards) where the combination of risk factors becomes important. Because everyone has different risk tolerances, each investor will approach these risks slightly differently. Doing the work up front to understand the risks that factor into a card is the first step before being able to assess and weigh those risks afterwards.
Thanks for reading this week’s newsletter - please subscribe/share below and if you ever have any questions, comments, or requests for future newsletters, reach out to @SportsCardAA on Twitter.
Disclaimer - the insights found in this newsletter or any other content provided by SCAA do not constitute investment advice. Investors are encouraged to conduct their own research.