Today's article is both revolutionary and simple in its premise. It introduces you to a pricing model that sophisticated financial markets use, but the fundamentals are easily understandable. Kelly Reid and I have worked on getting better at what we're calling The System when we make runs on stores, trade and speculate on the next upcoming cards, and today, we are going to start sharing it with you - our Insiders. We have already made hundreds of dollars on this, but we can't make all the money there is to be made in this, since we don't have infinite cash to throw at it. That's why we're sharing it.

This is a principle that's stupidly simple and you might be inclined to say "Doug, why are you wasting our time with this? This is self-evident!" The System is designed to mitigate the worst enemy that a speculator faces: his own fear.

It's your fear that holds you back from hitting "buy" when you get an email from us saying "buy Olivia Voldaren" when she's $3, and it's fear that makes you distrust your own gut instincts about the next hot card. That fear feeds into a loop where you see what would have happened if you'd trusted yourself and you feel even worse that you didn't go for the good tip. Worse, you might start over-correcting and throwing money around.

The System depends on a few central maxims, and I am going to share what Kelly and I have discovered with you.

The real price of a card is the difference between what you buy it for and what you can sell it for.

This is the core principle and all others flow from it. When a currency trader considers buying British pounds or Icelandic Krona (don't!), he must consider that the transactional costs - dealer fees, conversions, credit card processing, etc., add friction to the exchange. If he turns dollars into pounds and back all day at the same exchange rate, he will go poor - he'll lose 1% or more each time, seeing his fortune shrink. The cost of a dollar, to our currency trader, is the difference between what he can buy it for - $1.00, and the price he can sell it for, after all is accounted for - $0.98, let's say. If our trader gets one dollar and the markets don't shift at all, he's risked 2% of his investment. All he needs to see is the dollar rise to cover that 2% and he's broken even. He just needs to see it rise another penny to see a profit.

People who trade on the foreign exchange know this principle well, and they use it to borrow vast sums of money to leverage against the market. Our trader borrows $10,000 to put into the bet on the dollar, knowing that if he's really only risking $200 at the outset. The cash inlay is big, but the risk is miniscule.

ForEx traders can run into big problems when the market shifts, but Magic cards are relatively stable in value over days. When you look at speculating on a card, you can depend on being able to resell it to dealers for the approximate value that you trusted when you bought it, and that price can hold up for about a week.

Let's look at an example. Kelly and I have been bragging on calling Huntmaster of the Fells early on. Why not? We've heard from multiple readers that the tip paid for their entire year of QS Insider. When we called it, Huntmaster was $11.50, which is a lot of cash. However, dealers were buying it for $9. If we bought every Huntmaster we could and immediately sold them, we'd only lose $2.50! The difference between the buy/sell price was about 21%. That means that if it went up to where playable Mythics usually go, we would see a big profit. Even if we had to sell them in a week or two at a loss, we'd only lose 20% of our investment. Of course, you know what happened to Huntmaster's price (and we seamlessly sold them back to the same dealers later in the week for $20 apiece), but let's look at something else that's a little more obscure.

Whipflare was another call from that same weekend. Whipflare was a decent sideboard card that shone in the playoff of the Pro Tour. It sold at 25 cents, but dealers were buying it for 15 cents. That means that we were only risking 10 cents on the card, not 25 cents - Whipflares would not suddenly be worth absolutely zero. The buy/sell margin was much bigger - 40% - but remember, we are looking at pennies of investment here. It pays to think big when you're looking at a card that only needs to make 25 cents to double up on.

With The System in mind, Kelly and I poured a lot of money into Whipflare and we should have pumped much more in than we did. We ended up buying 98 copies - an astronomical amount. Thanks to TCGPlayer for not canceling our orders! Of course, we "smurfed" our orders like a good money launderer would - buying twenty here and twelve there. Combined with other calls we were making, the shipping was manageable. But those 98 copies doubled in value, so our $25 investment ($15 risk) turned into $50. I know it looks like we doubled up, but we really tripled - we only put $15 on the line, after all. If we didn't keep the buy/sell margin in mind, we would have thought that Whipflares sold for zero to a dealer and not risked the 25 cents apiece. Looking it up, seeing that it had a buy price from someone, meant that the card was much less risky than it normally appeared.

Here's a thought experiment: what if I told you to pick up an old Arabian Nights card that's currently $50? Do you balk at that price? Would it change your mind if dealers bought it for $40? Now all you need to see is your card rise a little in value - a $10 value change on buylists - and you'd cover your cost. You're paying $10 to see if this bet pays off - not $50.

The size of your war chest dictates whether you make "some" money or "lots of" money.

I'll admit that my last experiment involved a little bit of cheating on my part. I assumed that you had hundreds or thousands in your trading account to get that Elephant Graveyard I was telling you about. We all take our war chest into speculative battle, full of gold and treasure. The bigger your initial amount, the more you can make. I have a finite amount, though, and so do you. Another big element of The System is to identify the smallest margins and capitalize on those, since you can only have so much money wrapped into your cards at any point.

Though you're dealing on margin risk and not actual cost, you would need $5,000 in hand to risk only $1,000 on our Huntmasters. I like to think of this as kind of like casinos that will only let you gamble on the upper floors when they know the size of your bank account, even though you're not risking the whole account that night. When you're looking at rent money vs. speculative money, you should always pay what you have to, first, but to make big profits with The System, you'll need to release your idea of absolute costs and embrace only the risk cost. It may mean putting $300 in where you only put $30 in before. After all, those Dungeon Geists that we told you to buy at fifty cents could sell to a dealer for half their price already... It may mean that you have forty copies of those geists instead of the two playsets you were thinking of buying. It may result in the fact that you made $120 instead of $20, all while only risking $12.50.

Don't risk more than 50% in a speculation.

Magic speculation can bring a lot of profits, but it can also make your money evaporate quickly if you put your money in cards that you cannot resell. The cards with the smallest margins are the most playable cards. That's because a dealer has both a demand for the cards and supply issues in making sure that they have enough to sell the customer. They'll happily buy a $10 card for $7.50 if they know they can make 25% on it all day long. They won't pay as much for something casually-popular but lightly played (so a high markup, like Gilded Lotus). If your card costs $1.00 but won't sell for anything above bulk, it'll only break your heart. You'll have enough opportunities, with cards like Whipflare, Vapor Snare, Dungeon Geists and Skirsdag High Priest, to risk only a little and stand to make quite a bit.

I'm happy to answer questions posted below, and I'm sure that Kelly will chime in, too. Until next week (with more examples of The System at work!)

-Doug Linn