A calm perspective on the Cannabis Boom

As you probably know, Canada plans to legalize recreational marijuana use in less than a month. You may not know that we recently launched a free email/web advisory, our TSI Cannabis Investing Bulletins. Our purpose is to give investors a conservative perspective on the cannabis industry and marijuana stocks.

Friends and business associates inside and outside the company wonder why we’re giving our cannabis newsletter away for free, especially with a cannabis stock boom underway. There are several reasons.

First, we only publish paid newsletters that focus mainly on high-quality investments. These are investments that are likely to provide you with long-term profits almost automatically, because they give you a way to tap into the long-term growth that you tend to get from buying common shares in well-established companies.

Share prices of all public companies, high quality or low, are sure to rise and fall unpredictably. But high-quality companies tend to accumulate profits, pay dividends, and benefit from the broad, lasting economic gains that accrue in Canada, the U.S. and other democratic countries.

Results will vary from one company to another, of course. Some of your favorite picks are bound to disappoint you. But gains from your winners will tend to overwhelm losses on your less-fortunate choices. As a result, when you invest in high-quality companies, time tends to work in your favour.

The longer you hold a diversified portfolio of high-quality companies, the more likely it is that you’ll show a profit, and the bigger that profit is likely to be.

Time works against you with low-quality investments

In low-quality investments, on the other hand, time works against you. These investments include stock options and other derivatives, and speculative stocks that have not yet established a pattern of success. For that matter, high-quality stocks can perform like low-quality investments if you engage in short-term trading.

We look on these areas as pastimes rather than investments. The profits are hit-and-miss. The losses you’ll suffer tend to overwhelm profits from the occasional big win: the reverse of the typical long-term pattern in high-quality stocks.

The big problem right now with investing in cannabis stocks is that these stocks are caught up in a boom mindset. Investors are focusing on the theoretical profits that might come from serving a vast new market created by cannabis legalization. They are disregarding the stock-market negatives. You might say they’re ignoring several of what we call the TSI Laws of Financial Physics.

Here’s one of the most powerful of these Laws: It’s easier to launch a stock promotion than to build a profitable company. That’s why bad stocks always out-number good ones. This is especially true in a setting like today’s cannabis boom.

When a speculative boom is underway, the profits from stock promotion mount up quickly. This attracts new promotors, and spurs the creation of more stock promotions. That inflates the bad-stock-to-good stock ratio even more.

Cannabis fans disregarding the business negatives

What’s worse, today’s cannabis-stock fans are also disregarding the business negatives. In past tech booms, for instance, successful tech businesses ultimately needed a technological advantage. In past mining and oil booms, success ultimately depended on finding mineral deposits that were worth exploiting, while the mineral they produced remained scarce and expensive.

Cannabis is an agricultural product: a plant. (Keep in mind that cannabis users refer to it as “weed” for good reason.) In the past, cannabis was scarce and expensive only because it was illegal. Legalization will cut production costs, and create a constant threat of surpluses. (Retail prices are likely to stay high due to taxes.)

Successful cannabis businesses will need big marketing outlays to brand their products. Meanwhile, established consumer-products companies with established branding expertise will enter the market. All this may add up to years of fierce, profit-less competition.

We’ve been looking for buys among cannabis stocks since the boom began. We have yet to find any we can wholeheartedly recommend. (Right now, by the way, we see more opportunity with less risk from the recent legalization of sports betting in the U.S., which we’ve analyzed here, and in our newest newsletter, “Spinoffs, Takeovers & Special Situations.”)

We’ll keep looking for cannabis-related buys. One day, we may devote a section of Stock Pickers Digest to them. Most of them may turn out to be consumer-sector multinationals, rather than startups.

No one can say how long the cannabis-stock boom will last. But it’s a good bet that it will end in tears for investors who fail to take the risks into account. In the meantime, we’re happy to publicize the risks and provide relatively lower-risk cannabis-investing ideas for investors who want to participate. If they like what they read, they may one day subscribe to our paid newsletters, or inquire about our portfolio-management services.

If you like what you read here, we would be grateful if you recommend us to people who might profit from our message. Click here to become a free subscriber to our TSI Cannabis Investing Bulletins.

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article originally ran on Sept. 25, 2018 and is republished on the Hub with permission.

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