Sports Card Investing

Sports card investing is the practice of buying sports trading cards for resale rather than for the pleasure of collecting them. The cards are collectibles in the tax sense, so long-term gain carries the higher maximum rate that applies to collectibles rather than the ordinary long-term capital gains rates, and an ordinary retirement account generally cannot hold them; the collectibles page covers both rules.

No agency defines the phrase, and the market itself uses "sports cards" for the objects. What makes the activity distinct inside the collectibles family is the infrastructure that has grown around condition. Independent grading companies examine a submitted card, assign a numeric grade on a published scale, seal it in a tamper-evident holder, and publish counts of how many cards they have graded at each level. The result is a collectibles market with something close to a specification sheet, where an art or wine buyer has to rely on scholarship and storage records instead.

Grading turns condition into a number, and the number travels with the card. How completely it does so is visible in a Form 1-A offering circular filed with the SEC in August 2022 for a single-card entity. The offering's asset is described as "a BGS 8-graded 1997 Metal Universe Precious Metal Gems Michael Jordan #23 trading card," and the circular's condition report adds that "the card is preserved in a plastic BGS holder and features sub-grades: 9 for 'Centering,' 8 for 'Corners,' 7 for 'Edges' and 9 for 'Surface.'" That is an overall grade plus four component grades, written into a securities filing as the description of the asset. Nothing comparable exists for a painting or a case of wine, where the equivalent disclosure is a narrative condition statement.

Population data makes scarcity a count rather than a claim. The same filing states that "there are eight BGS 8-graded 1997 Metal Universe Precious Metal Gems Michael Jordan #23 trading cards in circulation." It also sets out the card's original print constraints: the 1997-98 Metal Universe Precious Metal Gems basketball set "consists of cards for 123 players," the cards "were serially numbered up to 100 and produced with green and red foil," with "the first ten numbered cards for a given player" in green foil and "the remaining 90" in red, and the filing states the odds of pulling that particular Jordan card from a 1997-98 pack were "1 in 17,500." A buyer of that card can therefore see a stated print run, a stated distribution rate and a stated count at the specific grade. Almost no other collectible market supplies all three.

The counts have a selection effect built into them, and it runs one way. Grading is a paid service, submitted card by card, and the fee does not scale down for a cheap card. That means a card is only sent for grading when the expected value of the graded card exceeds the ungraded card plus the fee and the shipping and the risk of a disappointing grade. So a population report counts cards that somebody thought were worth submitting; it is not a census of surviving examples. Two consequences follow. A population of eight at a given grade does not mean only eight such cards exist, since ungraded examples in similar condition may sit in collections. And the lower grades are systematically undercounted relative to the higher ones, because a card in poor condition is the one least likely to justify the fee. Reading a population report as a supply figure rather than as a submission figure overstates scarcity.

Because the grade is public and priced, each grade is effectively its own asset. Sales data is organized by card and grade, so the market forms a separate price for the same card at each level of the scale. That is why the grade, and not merely the card, is what a seller advertises, and why resubmitting a card in the hope of a higher grade is a recognized practice. It also means the grade concentrates a great deal of the value in a single private company's opinion. The scale, the standards applied and the population report are each published by the grading company itself, and there is no public authority that reviews them.

The fractional route is the same securities mechanism art uses. Rather than buying a card outright, an investor can buy interests in an entity whose only asset is one card, and that is an offering of securities. The filing quoted above was made under Regulation A, which means the sponsor had to file an offering statement on Form 1-A and could not accept money until SEC staff qualified it. The circular records the terms that come with the structure: the entity buys the card "from our manager," there is "no minimum number of interests or dollar amount that needs to be sold as a condition of any closing," and transfers of interests are restricted, with secondary trading intended through a registered alternative trading system rather than an exchange. The filing also carries the risk factor that matters most for a unique object: there is "no guarantee that the underlying asset will be free of any claims regarding title and authenticity (e.g., counterfeit or previously stolen), or that such claims may arise after acquisition."

What the filing says about the market's own history is worth reading as the filer's characterization rather than as fact. Its market assessment says that "with the development of the serial number system and card grading, what was once a hobby has become a valuable industry," and that "through built-in scarcity and a throwback to childhood collecting, the market has grown thanks to the liquidity that online marketplaces provide." Two of the three drivers it names are structural and durable, the serial numbering and the grading system. The third, online marketplace liquidity, is the one that can withdraw, and a market whose price discovery depends on active online bidding is thinner when that bidding thins out.

Direct ownership runs like this. A buyer acquires a card, raw or already graded, from a dealer, an online marketplace or an auction. If the card is raw and looks likely to grade well, the buyer submits it to a grading company, pays the fee, waits, and receives it back encapsulated with a grade. The card is then held, and eventually sold through a marketplace or auction house that takes a commission. Storage and insurance are modest compared with art or wine because the objects are small, but the grading fee is a real and unavoidable decision cost that has no equivalent in the other collectible markets.

A hypothetical example of the grading decision, using round numbers. Suppose an ungraded card would sell for $120 as it is. Graded at a high level it would sell for $600; graded at a middling level it would sell for $150. Grading costs $40 including shipping both ways. If the buyer thinks there is a 30 percent chance of the high grade and a 70 percent chance of the middling one, the expected proceeds are 0.30 times $600 plus 0.70 times $150, which is $180 plus $105, or $285. Subtracting the $40 fee leaves $245 expected, against $120 for selling it raw, so submitting is worthwhile on those assumptions. Now suppose the same card would only fetch $200 at the high grade and $110 at the middling one. The expected proceeds are 0.30 times $200 plus 0.70 times $110, or $60 plus $77, which is $137, less the $40 fee leaves $97, below the $120 the raw card would bring. That is why cheap cards do not get graded, and it is the mechanism that makes every population report a count of submissions rather than of surviving cards.

Pros

• Condition is quantified and portable. A graded card carries a numeric grade and, on some scales, component sub-grades, so buyers and sellers are describing the same thing.
• Scarcity is measurable rather than asserted, through published print runs and published counts of cards graded at each level.
• Encapsulation protects the card and makes tampering evident, which reduces one whole category of condition dispute.
• Storage and insurance costs are small in absolute terms compared with art, wine or bullion.
• The fractional route is a filed, SEC-qualified offering, so the fees, conflicts and risks are readable on EDGAR.

Cons

• The grade is one private company's opinion, and the scale, standards and population reports are that company's own publications with no public authority reviewing them.
• Grading fees are charged per card regardless of value, so they can exceed what a card is worth and they bias population data toward higher grades.
• Population figures count submitted cards, not surviving cards, so reading them as supply overstates scarcity.
• No income at all, and the price depends on marketplace liquidity that can thin out quickly.
• Title and authenticity claims can arise after purchase, as the filed offering circular for a single graded card expressly warns.
• Long-term gain carries the higher maximum collectibles rate rather than the ordinary long-term capital gains rates.