Trusting the Math: Why Our Data is Telling Us to Take More Risk

We've gotten strong results from recent PSA submissions. This is how we're adjusting our strategy.

This is a bit of a different post than I usually make, but this one will be looking at the importance of keeping good data, and how that can drive decision making.

Our business model relies on buying, grading, and selling cards based on Expected Value. The expected value calculation is based heavily on a card’s Gem Probability – or the percent chance we believe a card has to grade as a PSA 10.

You can find a more detailed breakdown of our pre-grading process here.

The Importance of Gem Probability

To show how important this number is, let’s look at two Expected Value calculations for the same card, but using different Gem Probabilities.

Calculation 1:

• PSA 10 Value: $400

• PSA 9 Value: $150

• Gem Probability: 50%

• Grading Cost: $30

• Fee Cost: 13%

• Expected Value = ($400 x 50% + $150 x 50%) x (87%) - $30 = $209

We could pay $159 for this card to make a $50 profit.

Calculation 2:

• PSA 10 Value: $400

• PSA 9 Value: $150

• Gem Probability: 25%

• Grading Cost: $30

• Fee Cost: 13%

• Expected Value = ($400 x 25% + $150 x 75%) x (87%) - $30 = $155

We could pay $105 for this card to make a $50 profit.

You can find a more detailed breakdown of how we calculate this here.

As you can see, the choice of Gem Probability is extremely important in determining the right price to pay for a card, and which cards will be profitable to submit to PSA.

The Problem With Overestimating Gem Probability

Let’s look again at the example above. Let’s say Calculation 2 is the correct expected value, but you’re buying based on Calculation 1. In other words, you are overestimating the Gem Probability. In this example, you are willing to pay $159 for a card with an expected value of $155. On average, you will lose money.

The Problem With Underestimating Gem Probability

Now let’s reverse this. Let’s say Calculation 1 is the correct expected value, but you make purchasing decisions based on Calculation 2. In other words, you are underestimating the Gem Probability. In this case, you will only be willing to pay $105 for a card that has an expected value of $209. You will decide not to purchase the card if it is available for $130. In this case, you are missing out on profitable inventory and leaving money on the table.

Note that IN GENERAL it is better to underestimate Gem Probability than to overestimate.

Overestimating your Gem Probability will lead to losses. It took us 6 months of consistent PSA submissions before we were happy with our results. As a beginner looking to make profit, you should be very cautious not to overestimate how well your cards will grade.

Our Case: Looking at the Numbers

For our own data, here’s what I’ve found looking at our last 15 submissions (about 300 cards).

• Average Gem Probability: 47%

• Actual Gem Rate: 68%

The Average Gem Probability represents our expectations for how many PSA 10s we would get. The Actual Gem Rate represents the actual results from PSA.

In other words, we have been getting significantly more PSA 10s than we have expected, and as a result we have likely passed on many potentially profitable cards.

Takeaways:

I think this is a good example of how keeping good data and analyzing it can drive business change. In our case, we keep records of our expected Gem Probabilities and keep detailed notes of the condition of all cards we submit. This allows us to update our models and improve our business results over time.

Going forward, we are going to be moderately more aggressive when buying inventory. We will see if this will drive business growth or if we’ll see our results fall off quickly, but for now, we’re following the data.