We know that systemic risk cannot be mitigated through diversification and that is a basic tenet to the concept of diversification. Traditionally, hedging is the tool of choice to mitigate some systemic risk. I would like to put forth a hypothesis that investing in the legal cannabis industry may just be another and here is why.
1. We know from past articles and content (including third party), that this is not another dot-com industry because dot-com was the creation of a new industry whereas this represents the transformation of an existing black market into a legal regulated market for recreational. It is also the creation and development of a new medical market. Cannabis as medicine dates back centuries so using the word “new” is somewhat ironic if not misleading. We also know the centuries of proven success of using hemp in textiles, building materials, food, etc.
This transformation is happening faster in more progressive countries (Australia, Canada, Germany, etc) but also within the USA with states such as California, Colorado, and Nevada leading the way. As a warning and this is something we discuss often – although as referenced above this is not a dot-com industry there are facets of this industry that mirror the dot-com era and these can typically be avoided through due diligence. This includes avoiding some paid stock promoters with their paid newsletters and by steering clear of many social media characters.
2. Medical research on various components of cannabis (including hemp) continue to yield encouraging results. Not only are there signs of success across an array of diseases and conditions but the cost of cannabis tends to be lower than the cost of traditional pharmaceuticals.
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The Dow Jones and other stock markets are at all time highs and the Economy appears to be overall humming along nicely. This prosperity is due to decades of astute economic and fiscal policy that has been fine tuned and tweaked over the years. It is difficult to objectively articulate that alleged unfair trade deals have done harm by countries such as Canada where the USA enjoys a trade surplus. Regardless of one’s politics, such action and rhetoric can only be viewed protectionist in nature. That truth cannot be denied or even reasonably debated. The debate may be around free or liberal trade vs protectionism and that is a healthy and fair debate. What does this have to do with the legal cannabis and hemp industries operating within individual states?
Some industries are somewhat immune to the increased costs associated with protectionist measures. Such industries are somewhat immune to changes in a currency’s valuation associated with downturns in an economy often as fallout from protectionist measures. Such industries are somewhat immune to any reciprocal measures invoked by countries targeted by protectionist measures. The legal cannabis industry within states may be such an industry. Crops often grown from seed to harvest to refinement to sale – the entire business cycle is typically contained within the borders of the state.
These indicators towards an inward focussed United States, regardless of the economic cost internally from a dramatic decrease in tourism and increased tariffs, may suggest that now is a good time to look at your overall portfolio. Are you invested in companies reliant on tourists and travel? Are you invested in companies that may be adversely affected by the slightest change in exchange rates or tariffs and quotas? Remember, despite the overall negative affect to the economy, such measures are designed to benefit of carefully hand-picked industries so these could be good short term options. There is nothing wrong with reviewing your portfolio and assessing whether the current climate will be short lived or is truly indicative of direction. A reasonable person might conclude it will be short lived because the proven overall success of liberal trade is indeed a strong economy and strong markets. The reasonable person might also conclude that any action that is directly contrary to the policies that have given rise to record levels of economic activity and market growth/wealth should not be pursued. Just who is this “reasonable person”? According to businessdictinary.com, the term refers to an:
Ordinary, prudent person who normally exercises due care while avoiding extremes of both audacity and caution.