How to Manage Concentration Risk in Card Grading
When to diversify your card holdings, and when to go all in on the top names.
Success in grading and selling cards profitably is all about maximizing Expected Value. At any given time, certain players, Pokémon, or card sets will offer stronger profitability than others. This commonly happens for athletes in the midst of a breakout season, or for new sets with minimal graded supply on the market.
As a result, we aim to identify the cards that can deliver strong profitability, and buy them aggressively. But this comes with a tradeoff — only targeting the most profitable cards means that you take on risk if these specific cards fall in value. For instance, if 50% of your inventory is invested in Shohei Ohtani cards, a substantial drop in his market will hurt you no matter how well you grade.
This post will highlight some of the ways you can manage that risk.
Hey everyone. I’m working on building a Facebook page with more card grading content! I’d really appreciate if you dropped a follow. You can find it here.
Managing Concentration Risk
1. Market Research
The first is regular market research. Always be looking for new cards to target, which naturally leads to more diversification. Ultimately, this will be limited by how many profitable cards are on the market at a given time.
2. Track Your Inventory
Keep close track of your inventory and where you have high concentrations. Our spreadsheet automatically generates a table that shows what players/Pokémon we have exposure to, the exact dollar amount we have invested, and the percentage of our total inventory that these cards make up. Having good data allows us to manage our exposure.
3. Setting Concentration Targets
You can also set targets for what you want your maximum exposure to be to an individual card or player. As a general rule, we try not to let any single player or card exceed 10% of our total inventory value.
With that said, the 10% target is more of a guideline than a hard limit. We’ll go a bit above 10% at times, specifically for generational players or when the Expected Profit is unusually strong. We’re also more willing to break it during a sport’s offseason, when injury and poor-performance risk is lower.
You can further diversify by buying different products. Buying Pokémon cards helps us diversify our risk from any one specific athlete (while buying sports cards also diversifies risk from any one individual Pokémon card). Additionally, if we were to expand to One Piece, Topps Chrome Disney, or some other product line, we would be able to diversify further.
4. Changing Profitability Thresholds
The last lever is your profitability targets. We generally target a 25% Expected ROI, but if a player is already at 10% of our inventory, we might require 40-50% ROI before buying more. This means we’re still willing to add exposure, but only if we can buy cards for great prices. This also adds a margin of safety that allows these purchases to remain profitable even if the market falls while the cards are being graded.
To illustrate: if a card has $300 in Expected Value after grading costs and selling fees, here’s how the max purchase price changes depending on the ROI target.
25% ROI Target: $300 / 1.25 = $240.00
40% ROI Target: $300 / 1.40 = $214.29
The Downside of Diversification
Diversification is good, but if you diversify too far away from the most profitable cards, you’ll generate less profit overall. The goal is balance. We buy aggressively when a card has exceptionally strong Expected Value, but diversification helps avoid large ups and downs in our business results.
That said, the diversification framework above assumes you're managing a meaningful amount of inventory. If you're working with a small amount of capital, there's no reason not to concentrate heavily into the two or three most profitable cards available. The boom and bust cycles are easier to absorb at smaller dollar amounts, and if you can only buy a few cards anyway, you may as well buy the most profitable ones. As your inventory grows, that’s where disciplined diversification pays off.