Making money in the stock market is an art. A successful investor requires the traits of a great painter. The more you mimic them, the more likely you are to produce profits. We applied our proprietary SP+GTM algorithm to evaluate what makes an investor successful on a consistent basis and discovered a unique corollary to great artists. Our exercise was originally conceived to understand the dynamics of cannabis investing. The reckless enthusiasm in this sector has attracted billions of dollars and has squandered almost as much. The actual and paper losses may excess a trillion dollars, more than the current industry is worth. Initially, the analytics were difficult to interrupt, believing that our calculations were misapplied. Not the case. The more the numbers were evaluated the clearer the conclusion. Cannabis investing in its present form is a no-win situation.
The reasons were dumbfounding. They correlate to the exact opposite of what makes a great painter. By understanding the dynamics behind fabulous artworks, the SP+GTM algorithm answered a data-fact: A successful investor requires the traits of a great painter. (1) A Strong Focal Point: A focal point is not like the big, bold “X” that marks the spot on a treasure map. It can take on any shape and size. It can be bold but it can also be subtle. A dappling of light, a pop of color, an expression or emphatic gesture — any of these can become a focal point in a composition. Regardless of how it is created, its purpose should be to engage the viewer or act as the culmination of the momentum built in the work. In Johannes Vermeer’s Woman Holding a Balance, the focal point of the painting is accentuated with nothing more than a glance and delicate hand position. (2) Layers of Color: When it comes to painting characteristics, color is key to keep in mind. Color makes a painting tranquil or vibrant, dramatic or stark. And, this comes about not only in your color choices but also how you build passages of color over one another or side by side. Warm and cool colors in a sky create a sense of atmosphere and space more than any one swath of color — no matter how perfectly matched it is to the sky above. In Pablo Picasso’s Portrait of Gertrude Stein, the colors are muted but quite varied — establishing a quiet and introspective mood. (3) Changes in Direction: In many great paintings, the image is realistically rendered, but brushstrokes are clearly visible. You are aware of how the painting is painted. Think about how the paint application of Jan van Eyck versus Vincent van Gogh perfectly reflects or resonates with what the artists painted. The way a brush moves paint around makes a statement that should be taken advantage of. You can start by being mindful of your brush’s changes in the direction, literally working on a painting with different strokes and from various angles. La reine dans Hamlet by Edwin Austin Abbey uses color contrasts and a slight diagonal contrasting with verticals to grab the viewer’s attention. When you look at works of art that you respond to, what do you see? The same truth is evident when you commit hard funds into intangible investments.
With the foundation of an Old Masters’ playbook, you are ready to make strategic investment in common stock and allow the Six Rules of Reality. (1) Patience: Above and beyond all the other realities, the degree of patience you possess with impact your final results. Perhaps this is because patience is actually the exact opposite of the profit-killing emotions which plague most investors, such as impatience, greed, and fear. In fact, a steady hand will often eliminate all the stock market mistakes which come along with frustration or anger or regret. In the world of investing, patience means profits. (2) Media Noise Kills: With constant distractions, and as many as 10,000 ads passing in front of you each day, how can anyone survive unless they are able to ignore the commotion? Even if we focus solely on the stock market, the deluge of data points and numbers is still far beyond overwhelming. The better you can get through all the mixed messages and contrarian opinions, the greater your final trading account balance. Don't get discouraged, you will find that you get pretty good at this stuff, and pretty quickly too! (3) Stay true to the commitment: Have you ever sold a stock, only to watch the shares climb higher? Similar to its close cousin "patience," staying the course should typically help you remain ahead of the pack. Said another way, trading more often does not usually result in greater or better trading profits. Quite the opposite, actually—frequency of trading is typically inverse to profits. (4) Relax: When the sky is falling, and crowds are trampling one another to dump their shares, the investors who remain calm win. In fact, the relaxed and thoughtful people among us will be able to recognize all the undervalued opportunities that others miss during the frenzy. (5) Research: Rather than bet on opinions based on limited knowledge, successful investors continually learn. Most people make decisions based on sound bites or partial arguments. In contrast, the greatest stock market traders conduct their own due diligence—and learn—until they know which investment moves will pay off. When they aren't sure about a trading move, they learn more—until they know plenty, and have a pretty solid understanding of their potential choices. (6) Listen: Great stock market investors are wise enough to know what they don't know. They lean heavily on the opinions and knowledge of experts and specialists. They are also not too proud to ask questions, and they tend to spend the time, in the beginning, to get all the facts, rather than doing their learning once it is too late. In other words, they make sure that they are well-informed and well-prepared.
The beauty of these personality traits of the great Old Masters can easily be replicated by you to become a great Investor.
Risks of Investing in Marijuana Investments
Different investors have different financial goals. More important, different investors have different risk tolerances. Conservative investors probably won't find much to like with most marijuana stocks because of their high risk levels and volatility. Meanwhile, aggressive investors might be comfortable buying marijuana stocks because “they are buying the noise and not listening to reality.”
The sectors:
Marijuana growers: Probably the most straightforward way of investing in marijuana stocks is to buy shares of a marijuana grower.
Marijuana royalty streaming: An intriguing twist to investing directly in marijuana growers is to instead buy a position in a royalty streaming company that provides financing to marijuana growers in exchange for a percentage of their production.
Marijuana distributors: Distribution is a key part of the cannabis industry supply chain. It involves transportation from growers, warehousing, and transportation to retail or dispensary locations.
Marijuana retailers/dispensaries: Marijuana retailers and dispensaries put marijuana products in the hands of end customers and patients.
Ancillary services/supplies providers: Any industry requires a host of providers of ancillary services and supplies.
Cannabinoid-focused biotechs: Cannabinoid-focused biotechs develop drugs based on chemical ingredients derived from marijuana plants or synthetic versions of these ingredients.
Risks of investing in marijuana stocks
There are three major risks associated with investing in marijuana stocks. (1) Valuation risks: Probably the greatest risk with buying any marijuana stock is that valuations of these stocks have increased so rapidly that share prices more than reflect the stocks' growth prospects. A stock's valuation can be assessed in several ways, including using the stock price in relation to earnings, revenue, and cash flow. Investors should note that many marijuana stocks aren't yet profitable, which makes assessing stock valuations more challenging. Because using historical data is so unwieldy, investors must rely on forward-looking projections of growth such as the price-to-earnings-to-growth (PEG) ratio or price-to-projected-future-sales ratio to determine if stocks are valued reasonably. And that opens up another can of worms. CEOs of marijuana growers sometimes mention global market sizes of $150 billion or higher. With a potential market that large, a stock with a market cap (the total market value of a company's outstanding shares of stock) of around $10 billion doesn't seem too expensive. However, it's important to understand that the $150 billion figure is based on a United Nations estimate of the global marijuana market including sales of illegal marijuana. Most of this illegal use is for recreational purposes, which remains illegal at the national level in all but two countries. It's possible that someday recreational marijuana will be legalized throughout much of the world. In the meantime, investors should be careful in which projections they use in determining the attractiveness of marijuana stocks. How big will the marijuana market realistically be? The global marijuana market will increase from $9.7 billion in 2017 to $32 billion by 2022. So will all marijuana stocks compete in a $32 billion market within a few years? No. The U.S. accounts for $23.4 billion of the total. Canadian marijuana stocks that are listed on the Toronto Stock Exchange can't maintain their listing and conduct significant operations in any area where marijuana is illegal at the federal level -- which, for now, includes the United States. That means determining valuations of Canadian marijuana stocks based on growth projections should focus on the Canadian market and markets outside the United States. It's also important to understand the potential impact of future supply-demand imbalances. A supply glut, a situation in which supply far exceeds demand, is predicted for the Canadian marijuana market by 2021 -- and perhaps earlier -- based on the rapid expansion of production capacity many Canadian marijuana growers are undertaking. (2) Dilution risks: Dilution occurs when a company issues new shares to generate additional capital for funding operations or expanding the business. The value of existing shares decreases as a result of the higher number of outstanding shares -- the total number of shares investors own, including those held by company insiders. Indeed, dilution is bad for current shareholders. Suppose a company has 10 million outstanding shares trading at $10 per share, giving the company a market cap of $100 million. If you own 1 million shares, your investment is worth $10 million. Now suppose the company issues 10 million new shares. Assuming the market cap remains constant, each share is now worth $5 rather than $10 because of the impact of dilution. Your investment that was worth $10 million would now be worth only $5 million. While dilution is a risk for many kinds of stocks, it's especially problematic for a lot of marijuana stocks. Because of legal barriers that prevented access to borrowing from banks, Canadian marijuana businesses had limited choices available for generating capital for funding operations and growth. Many of these companies used an approach referred to as bought deal financing, whereby an investment bank or syndicate agrees to buy all of the securities a company issues at a predetermined price. While this approach allowed marijuana companies to raise much-needed cash, it also dramatically increased their numbers of outstanding shares and diluted the value of existing shares. It's possible that the dilution risks for at least some marijuana businesses could diminish as they become consistently profitable. Until that happens, though, dilution remains a serious threat for investors to take into consideration. (3) Commoditization risks: One risk that especially applies to marijuana growers and to royalty streaming companies is the potential for commoditization -- when a product becomes indistinguishable from other products. Marijuana is an agricultural crop. And all agricultural crops are commodities. It's not just agricultural crops that are commodities, though. Precious metals such as gold and silver are commodities, too. So are resources including crude oil and natural gas. Other types of products can be commoditized as well, such as memory chips, hard-disk drives, and laptop components. Any product for which price is the only or dominant differentiating factor among multiple vendors is a commodity. Commoditization weakens the pricing power for producers. In other words, companies can't raise prices for their products without causing demand to fall. For example, if one gas station raises the price of fuel significantly higher than its competitors, it will lose business as customers choose to fill up at other gas stations with lower prices. When demand is greater than supply, commoditization isn't a big problem. But when supply exceeds demand, as will eventually happen in Canada, commoditization could hurt marijuana growers, particularly smaller ones that don't have the same economies of scale -- cost savings that result from increased size and scope of operations -- that larger producers have.
Current risks specific to U.S. marijuana stocks
Prosecution risks: Although many states have legalized medical marijuana, recreational marijuana, or both, their laws are in direct violation of federal marijuana laws. During the Obama administration, the official federal policy was to avoid interfering in states that had legalized marijuana. However, in January 2018, U.S. Attorney General Jeff Sessions rescinded the Obama-era policies. His move cleared the way for U.S. federal attorneys to prosecute anyone who possesses or sells marijuana -- including medical marijuana. Sessions had a long history of opposition to marijuana before becoming attorney general. His opposition continued after taking the top spot in the U.S. Department of Justice (DOJ). Could Sessions instruct the DOJ to target marijuana businesses operating in the United States? Theoretically, yes. And that means a dark cloud hangs over the U.S. cannabis industry. There are a couple of obstacles, though, that hinder Sessions from taking action.
First, the Rohrabacher–Farr amendment has been part of each spending bill passed to keep the federal government running since 2014. This amendment prohibits the DOJ from using money to interfere with state laws legalizing medical marijuana.
Second, President Trump has expressed support for medical marijuana and a willingness to leave laws pertaining to recreational marijuana to the states. In April, Sen. Cory Gardner (R.-Colo.) announced that the president pledged to support "a federalism-based legislative solution to fix this states' rights issue once and for all" -- apparently thwarting any plans that Sessions might have had to target marijuana businesses.,Sen. Gardner is co-sponsoring legislation with Sen. Elizabeth Warren (D.-Mass.) to prevent the federal government from interfering in states that have legalized marijuana. Both of the senators' home states, Colorado and Massachusetts, respectively, have legalized medical and recreational marijuana.
The Rohrabacher–Farr amendment is only effective temporarily, though. It's possible that a budget bill could be passed without the amendment, which would then allow the DOJ to use funds to prosecute medical marijuana businesses. Also, the amendment doesn't prevent the DOJ from going after businesses involved in the recreational marijuana market.
There's no guarantee that Gardner and Warren's legislation will pass Congress. Until U.S. federal laws are revised, the potential for the government to prosecute marijuana-related businesses remains a possibility.
Risks associated with obtaining banking and financial services: Even if businesses operating in the U.S. cannabis industry aren't prosecuted, they face another risk on an ongoing basis -- obtaining banking and financial services. Because selling marijuana is illegal at the federal level, banks or other financial institutions that handle money made from marijuana-related businesses could be accused of money laundering (that is, concealing the origin of money made illegally).
Many banks have opted to steer clear of dealing with marijuana businesses because of the risks of running afoul of federal laws. That has resulted in marijuana businesses being forced to operate on a cash-only basis. One downside is that it makes companies more susceptible to robbery. An even greater problem, though, is that it limits their ability to obtain capital needed for expansion.
Some banks and credit unions have chosen to do business with U.S. companies operating in the cannabis industry. As a result, the risks for marijuana-related businesses in obtaining banking and financial services aren't as great as they used to be.
In addition, some U.S. companies have attempted to sidestep the issue of raising capital by listing on Canadian stock exchanges. MedMen, for example, is based in California, but its stock is listed on the Canadian Securities Exchange (CSE). Unlike the Toronto Stock Exchange, the CSE doesn't prohibit marijuana businesses with U.S. operations from listing.
Risk vs. Reward
The risks associated with investing in marijuana stocks are real and can't be ignored. The global cannabis industry continues to grow . There will be both winners and losers over the long run, just as in any other industry. Being aware of the risks and finding ways to limit them can help improve your prospects of picking the winners.
Are you the next great artist to Master Investing?