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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Holding dozens or more sector specific stocks defeats the purpose of MPT and in fact increases your risk of holding one that goes south while simultaneously ensuring your dollar holdings in any ones that spike is less. Therefore, there must be a sound reason as to why we are seeing more and more self-identified investors declaring on social media and bulletin boards their breadth of cannabis holdings. Yes, always be skeptical of using forums (bulletin boards) and platforms (social media etc) as reliable sources but they are useful to identify trends. CannaInvestor Magazine is no stranger to this strategy of over diversification and you may recall we referred to this as the shotgun approach. Some refer to this as making as many bets as possible. This approach is also akin to a large spider web where the slightest disturbance in one area results in the spider(s) converging on that spot. Holding many positions with news alerts activated allows an investor to take full advantage when good news comes – move money from other positions and converge. There are also the transaction costs for selling and buying to consider as well as the cost of dead money sitting as you wait for good news – capital gains, foreign currency transactions, etc.
When we pioneered that strategy the times were different. A Canadian LP, on being granted a cultivation license for example, experienced a share price appreciation. However, as you know, to be successful in this market one must be adaptive because one must view the industry as an ecosystem. Today when a Canadian company is issued a cultivation license the share price tends to fall because investors now know that a sales license is typically six to thirteen months away and during that time the company tends to raise capital to fund expansion and for working capital needs. As CannaInvestor Magazine discussed, this approach was short lived. Holding many companies now means you increase the odds of holding a company as the share price falls due to financing or going concern challenges (The Consolidation Curve). So why then do we see an increase in this approach – at least as measured by social media and bulletin boards?