Issue #60c - Investing in Marijuana
Investing in Marijuana
Throughout my career, there are few subjects that have garnered more attention than investing in marijuana stocks. Perhaps this interest is due to the fact that this is the first ‘new’ major industry to spring out of nowhere since the Dotcom bubble. Maybe it’s the fact that people feel that they can understand the business model, grow a product, sell it in stores, and reap the profits. Whatever the reason, a seemingly endless stream of novice investors have been pouring their hard earned dollars into the hundreds of companies that are tied to this budding industry.
According to Deloitte, the Canadian marijuana market should see sales of $7.17 billion in 2019, of which $2.3 billion will remain illicit. The assumption is an optimistic one that predicts Canadians will rapidly increase their use of the drug thanks to edibles, alternative consumption items, and an aging population more apt to seek marijuana’s medicinal benefits.
Undoubtedly the market potential is substantial but only a few companies will make it. As it stands, there is no real way to know which of the many companies will actually still be in business in a decade’s time. Given their current stock valuations, often several hundred times its current accounting values (book value), each one of these companies seems to be priced as if it will become a perfect success story matching their optimistic forecasts. This optimism means that investments in this sector are based on what ‘could be’ rather than what ‘is’.
Warren Buffet’s mentor, Benjamin Graham, addresses this approach with his number one rule in his seminal investing classic The Intelligent Investor; “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
As mentioned in The Motley Fool’s excellent article on value investing, “There are several key ideas packed into those two terse sentences (…) But the big one is this: Value investors aren't looking for the ‘next big thing,’ a company that might become a great company in time. The giveaway is that word ’might.’ To Graham, if the investment case for a company involves things that could happen in the future -- but won't definitely happen -- then it's speculative.”
Simply put, this bet is the kind that can end one of two ways: a homerun or a strikeout. Most of our clients have tasked us to steward their wealth for retirement or their heirs. For that reason, we recommend that clients resist the urge to jump on this bandwagon and stay focused on their long-term plan of earning an adequate rate of return to meet their goals, rather than betting the farm on a puff of smoke.
We aren’t the only ones who feel this way. Here’s a flurry of excellent articles that spell out the dangers of this speculative market that is attracting novice investors.
Maclean’s: Investors are delusional when it comes to Canadian marijuana companies
Bloomberg: High Times for Marijuana Stocks
Motley Fool: Are Oregon's Marijuana Woes a Precursor of What's to Come in Canada?
Impact to investors
None. At present, we are not recommeding marijuana stocks and have no intention to do so until the economic fundamentals of the investment make fiscal sense. Further, we have little to no exposure to Canadian beer, liquor, or tobacco producers who might lose market to this new industry. For those investors who are interested in taking up a small position for the sake of ‘FOMO’ (Fear of missing out), we recommend an industry-wide approach like Horizons Marijuana Life Sciences Index ETF.
Innova Wealth Management is a trade name of Aligned Capital Partners Inc. (ACPI). Jean-François Démoré, as an agent of Innova Wealth Management/ACPI is registered to provide investment advice in the provinces of Ontario, Quebec, and British Columbia. Investment products are provided by ACPI, a member of the Investment Industry Regulatory Organization of Canada (www.iiroc.ca) and the Canadian Investor Protection Fund (www.cipf.ca). All non-securities related business conducted by J-F Demore as a representative of Innova Wealth Builders is not covered by the Canadian Investor Protection Fund and is not under the supervision of ACPI.
The information contained herein was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any securities mentioned. The views expressed are those of the author and not necessarily those of ACPI.
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