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.) Continue Reading…