There are plenty of adages that are bandied about when talking about speculating. "Don't put all your eggs in one basket," "A rising tide lifts all boats," "Buy the rumor, sell the news" are some financial sayings you might be familiar with. Each has a nugget of truth and is worth thinking about on its own. But here's a doozy from Warren Buffet that needs to be learned, relearned, studied, and remembered.

Rule #1: Never Lose Money; Rule #2: Never Forget Rule #1

Losses are painful, and one thing that the mind is ready to do in order to avoid this pain is to pretend that a loss wasn't as bad it looks, or that there were external factors that caused the loss, or just to forget about it entirely. This is very natural behavior. No one likes to dwell on their mistakes and relive past failures. Focusing on successes and good times feels better! It might be a really obvious to say "Never lose money." But in practice it takes an honest approach and a few losses under your belt before Buffet's insight can be properly understood. Once you are not fooling yourself on how well you are speculating, then you can be begin learning from your mistakes.

A Rule of Thumb for Junk Rares

When looking for speculative targets, it's easy to look at a long list of rares in the 0.05 to 0.25 ticket range and imagine the possibilities of one of these cards breaking out and shooting up in price. It's been my experience that this doesn't happen often, especially once a set has been out for a while. In a few weeks, most of the best cards from Gatecrash will be largely figured out, making the chances of brand new deck archetypes increasingly slim. And yet those junk rares will still be attractive due to their low price.

However, the margins that bots give on rares at this price are not favorable for speculating. Suppose you were looking at supernovabots's price list (all prices current as of Feb. 20th, 2013) for cards to speculate on. If you are buying a card like Assemble the Legion right now the buy/sell prices are 0.094/0.155.  That's a spread of 0.061 tix or a spread percentage of 39%. To calculate the spread percentage, take the sell price, subtract the buy price, and divide by the sell price.

If this card doubles in price to 0.31 tix, and the spread percentage is the same, then selling this back to supernova would get you about 0.19 tix, which is a net profit of 0.035 tix. A card doubles in price, and you get 23% profit when dealing with a bot. That doesn't sound so hot, especially considering the amount of work involved.

Compare this to a card like Hallowed Fountain, which has buy/sell prices of 3.1/3.6. This is a spread of only 14%. If this card doubles in price to 7.2 tix and the spread is maintained, then you could sell back to supernova for 6.2 tix. In this case, a double in price translates into 72% profit. In terms of percentage your net profit is much higher. In this case, a lower margin has translated into higher profits for the speculator.

Let's figure out what it would take to get a 72% net profit on Assemble the Legion. In order to net 72% on .155 tix, the buy price has to be 0.266 tix. At a spread of 39%, this suggests a sell price of 0.436 tix. All told, you'd need Assemble the Legion to almost triple in price to get the same net profit in percentage terms as compared to a doubling in price of a lower margin card like Hallowed Fountain.

When speculating on junk or near junk rares through bots, to make a decent profit percentage you are looking for something like a triple in price. And the further you get away from junk prices, this becomes more and more unlikely. A tripling in price is much easier if the card starts at a price of 0.05-0.1 tix. As a rule of thumb, avoid speculating on junk rares unless they are in this price range. Junk rares are bought and sold at much higher margins meaning your potential profits are much smaller. Treat junk rares as a gamble and stick to the cheapest ones.

In terms of mythic rares, the price level cut off is a bit higher, but in general avoid mythics that are over 0.60 tix. These ones are easy to spot. They are things like Quicksilver Gargantuan and Balefire Dragon, big creatures that aren't really doing anything worthwhile. Watch out for a card that has been or will be heavily opened though. Quicksilver Gargantuan hit 0.35 tix during New Phyrexia release events, so thinking a junk mythic is a good buy at 0.5 tix might be a mistake if there are release events yet to flood the market. Also, the recent change to redemption fees means we might see new, lower price floors for junk mythics.

Avoid Speculating on Niche Formats

Classic/Vintage and Legacy don't have a strong level of interest on MTGO. Hype tends to build for these formats if there are tournaments worth playing for, but otherwise the background level of interest remains too low to fire events consistently. And without events firing consistently, demand for singles stays low. If there is a Magic Online Championship Series (MOCS) tournament or other special events to play for, then interest will be ignited for a short while, but otherwise it's just not going to happen for these formats. If you are curious about these formats and are looking for some discussion about why they have difficulty catching on, head over to Classic Quarter and check out the forums there.

For speculators, this means that these formats don't see a lot of volume when cards are moving. Lower volume means the bots are collecting higher margins. With higher margins, it'll take either more work to use the classifieds in order to buy and sell these cards, or you need really dramatic price swings to make a profit, as you can see from the junk rare analysis above.

Sticking to Standard and Modern means you are working withing a space where there are times of strong demand and a higher volume for singles. This means that any position is generally easy to liquidate and bot margins are smaller. Standard is the most popular constructed format on MTGO, and is generally active all year. Interest in Modern has been building, and is getting official support from WoTC with online PTQs and reprints to keep costs down. As a general rule, both formats should be the speculator's first focus before branching out and looking at other something like Legacy or Pauper.

Think About What Can Go Wrong

During the MED events from late Fall, I bought ten copies of Force of Will at an average price of 83.3 tix. I bought seven of them by posting to the classifieds and scooping up cards from drafters, and the last few I bought from bots. By the end of the first weekend of events, Force of Will sat above 90 tix, and my position was looking good. I had identified an opportunity, bought at the bottom, and could already cash out for a small profit. It looked like the start of a decent trade. I was anticipating that a MOCS event in 2013 would be Legacy and that by that time, the price of Force of Will would have increased enough that I could book some nice profits. After all, Force of Will hit 140+ tix in and around the last Legacy MOCS event. In this case I had sized up all the things that could go right and decided to take the plunge on a high-priced spec.

What was I ignoring in this case? Well, first of all, the MOCS schedule is not announced in advance. There might have been an event last year in the Summer, but maybe this year it would have got pushed back to the Fall. This was quite a few tix to tie up in a position that didn't have a target exit date. By having no definitive timeline, I was exposing myself to more uncertainty and more risk.

But lo and behold, the first MOCS championship turned out to be Legacy! What a stroke of luck! Prices might ramp up considerably in a short while and I would stand to reap a ton of short term profit selling Force of Will to eager Legacy players. Well, the fact that promo Force of Wills were handed out for getting 15 QPs leading up to the Legacy MOCS torpedoed any chance of booking a profit on this position. Lacking a timeline for exiting this position exposed it to some uncertainty, and this was compounded by the reprint of Force of Will.

Reprint risk is something to always keep in mind for older cards. Aside from timing my buys well and approximately hitting the bottom, I took on too much risk in order to speculate on a niche format. WoTC has shown a willingness to reprint cards in novel ways, so sticking to Standard and Modern cuts down on this particular type of risk. If you were ultra vigilant around reprints then you'd speculate on sets currently in or just rotated out of Standard.

Stick to What Works

One great way to avoid losses it to stick to what works. There are a few consistently profitable strategies that should be the bread and butter of every speculator on MTGO. First of all, pay attention to redemption. This MTGO feature drives the most consistent (if somewhat boring) profits from the MTGO economy. This means buying up mythics from sets that have just rotated out of Standard and sitting on them until their prices rise due to demand from redeemers. Although the recent changes to the redemption fee haven't yet become fully understood, this strategy should remain intact.

While on the subject of Fall rotation, if you had only a few weeks in the year to take all your speculative positions, the best choice would be the end of October and early November, hands down. Besides scooping up cheap mythics from rotating sets, Modern staples from these sets will be on sale too.

Next, if you have a choice to speculate on real estate or some other card, stick to real estate. Good dual lands are widely used by all players which means that they will hold value over time. Even the core set dual lands are still worth something despite multiple reprints. On the other hand, a card that is a standout in a certain format might not translate very well into others. In comparison, you can bank on good dual lands being use in multiple formats.

Lastly, cards from a third set are better speculation targets than ones from a second set, which in turn are better than cards from the Fall set. Differing block structures can muddy this up a bit, but it's a great rule of thumb and you'll often hear speculators referring to the "third set effect." Generally, the cards from sets that have been opened the least have the greatest speculative potential due to their relatively short supply. All things being equal, focusing time and energy on cards from third sets pays off with higher profits due to more limited supply.

With all of this in your back pocket, you could happily reap consistent profits from speculating on digital cards. Stick to what works, avoid losses and you'll be building up a sizable portfolio over time.