Welcome back to the SCAA Weekly Newsletter. I hope everyone enjoyed their Holidays and wish you all the best going into 2021.
Our topic this week is in response to a common piece of confusion/frustration I see floating around the hobby frequently - why are prospect cards so expensive? In many occasions, they are roughly equivalent, or even more expensive, than cards of established stars who have been in the league for a decade and have had the type of career that prospects could only dream of. Why would a prospect who hasn’t played above the lower levels of the minors have cards priced on par with players who have been an All-Star?
Case Study
This concept certainly seems odd at first blush, but it isn’t as crazy as you might think. Our case study is going to compare Paul Goldschmidt (star veteran first baseman for the Cardinals) to Andrew Vaughn (White Sox minor leaguer who is the #13 prospect in baseball). Goldschmidt is a 6x All-Star, 3x Gold Glove winner, and 4x Silver Slugger winner who has finished in the top 6 in MVP voting 4 times. He has had the type of career that the White Sox dream about for Vaughn, who was the 3rd overall pick in 2019 and has never played above High-A. Vaughn won the Golden Spikes Award as a sophomore at Cal and has the tools to be a cornerstone at first base for the White Sox for years.
Comparing each player’s recent sales of their non-autographed Bowman Chrome PSA 10 1st Bowman cards (Goldschmidt and Vaughn), the prices are both the same $65. There are 432 PSA 10’s for Goldschmidt and 622 PSA 10’s for Vaughn, so Goldschmidt’s card is more scarce than Vaughn’s as well. But if Vaughn is simply hoping to have the career that Goldschmidt has already had, then why are their cards already priced largely the same? Doesn’t that ignore the risk that Vaughn presents and downplay what Goldschmidt has already accomplished?
The answer can be found when looking at the concept of the Dividend Discount Model for valuing a company’s stock price. This model says that the “present-day price of a stock is worth the sum of all of its future dividend payments when discounted back to their present value.” The key concept here is that the stock’s value is established based solely on the company’s forward-looking performance, which then generates cash flow that is distributed back to shareholders over time. When a company beats forecasts on quarterly earnings, the stock price does not go up because of the company’s outperformance in the prior quarter. It goes up because that prior quarter’s outperformance indicates that the company is going to do better than previously-expected in the next quarter, thereby increasing future cash flows.
Bringing it back to our card comparison, rather than thinking about the above model in terms of cash flows, which are what drive a stock’s performance, think about it in terms of what drives a card’s performance: collector interest in the player. Broadly speaking, collectors have the most interest in three types of players: current stars (the most relevant to current dialogue and analysis about the sport), legends (players who have cemented their legacies as memorable components of the history of the sport for their respective eras), and prospects (the players who have the potential to ascend into the first two buckets sometime in the future).
Falling between the cracks of these three buckets is what leads to erosion of value for a card. Examples of this are young players who are not considered to be viable candidates for future stardom (basically any recent card of a player who doesn’t appear on any prospect ranking lists), active or recently retired players who have lost relevance as their performance has declined (ex. - Hanley Ramirez), or historical players who had good performance during their era, but have since been forgotten by most collectors (ex. - Ken Boyer).
Putting this together - the price of a card is determined by future interest in the player. For future interest to be strongest, a player has to fall into the star, legend, or prospect buckets. For Vaughn, it is very clear that he falls squarely in the prospect bucket. When you buy a card of his, you are paying for the potential that he becomes a star in the MLB and garners the type of attention from collectors that you see for players like Bellinger, Soto, and Yelich. If things pan out for Vaughn, he will be relevant in the eye of collectors for a decade or more, providing ample opportunity for growth. For Goldschmidt, he is in risk of falling between the cracks of having been a very good player in his era, but being forgotten by collectors in the future as they narrow their focus on the truly legendary players of the time (ex. - Miguel Tejada).
When comparing the two cards, you need to be comparing everything on a forward-looking basis. A helpful visualization of this concept is an S-Curve outlining the life of a business. Vaughn is on the bottom left of that chart - he comes with risk, but has huge room for growth, offering high return potential if things go right. Goldschmidt is on the top right of the chart - given that he has already ascended to about as high as he is going to get in terms of hobby relevance, he will be relatively flat in the eyes of collectors in a best-case-scenario, with risk that he will slowly fade out of investors’ focus over time and decline in value.
On a forward-looking basis, who do you think is more likely to be relevant to investors in 5 or 10 years? Which player’s forward-looking risk/reward profile do you find more attractive? Despite the fact that Goldschmidt has had the career that Vaughn is aspiring for, the fact that their cards are priced relatively equivalently is not surprising when you think about what that price represents. The only relevance of the past in this case is how much Goldschmidt’s past accomplishments will matter to investors in the future. If he has done enough to remain relevant to future collectors when he is done playing, he will retain value. If he hasn’t, his cards will drop in value over time. On the other hand, Vaughn offers huge growth potential, albeit with material risk.
Key Takeaways
For every type of investment, your evaluation has to be forward-looking. Prices of investments, including cards, represent how investors perceive their future potential, not their past accomplishments. For whatever time horizon you think is appropriate for a given card’s investment thesis, think about the spectrum of outcomes over that period with regards to how relevant that player will be to collectors. Will he be elected to the Hall-Of-Fame? Is he so interesting that they will have a documentary come out about him? Will collectors forget about him as he moves out of the hobby’s eye? Building your own expectation of future interest in a player is a key component to evaluating long-term investments, and explains the central reason why current card prices don’t always align with how players have performed in the past: prices reflect future performance expectations.
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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.