Christmas was sneaking up on the calendar and I decided to drop by one evening to grab some favourite takeout from a local Greek Restaurant. As a regular, I’ve had the pleasure of getting to know the family over the years. As I sat waiting, the daughter working the cash was watching her brother and his two buddies off to the side in a frenzy as they focused on an iPod. Knowing what I do for a living, she giggled, looked at me and uttered one word, “Bitcoin”. Her brother and two buddies had pooled some cash and entered the domain of cryptocurrencies.
Of course, just like a Doctor at a dinner party, I was asked for a diagnosis. I launched into my thoughts about being late to the party, potential regulations, money laundering and a litany of other precautionary tales. Would it be enough? Probably not. I’ve seen this lemming attitude before over 3 decades of get rich quick schemes. It’s all about risk, supply and demand.
However, that said, 2017 had many including some of our own clientele asking questions about cryptocurrencies, rare metals like cobalt and lithium for use in batteries for electric vehicles and of course the big elephant in the Canadian market, Marijuana stocks.
The above illustration represents what more often than note happens when everyone feels they missed the ride up and piles in at a market top. That said, when “piling” into one hit wonders, these same anomalies can occur in isolation and without much notice. The number one source of debate has focused on “Pot stocks” in Canada given that if you had excluded their collective performance last year, the S&P TSX Index would have had a less than stellar year. As it was compared to the U.S S&P 500, the Canadian market was nothing to write home about.
Let me remind everyone of one infamous but successful asset bubble. It occurred back in the late 1990’s when technology companies had their valuations going up like pump handles. The pressure we felt as “informed” managers to “load up” on tech stocks was enormous. Investors ignored prices and subsequent valuations. It became an unlikely strategy of “growth at any price” but when the bubble burst, it became “growth does indeed have a reasonable price”. You would have thought lessons learned yes? Nope. Here we are again.
Today marijuana companies are getting press because they are ramping up hiring in anticipation of legalization. Are they paying for this out of profits? Not a penny. Not a single entity has shown a dollar’s worth of profit yet. All via cash flow. Unlike umpteen tech firms that became transformative to our lives and survived the bubble with consistent profitability, many unresolved questions and some certain issues still plague this new industry:
- It is certain that profit margins will fall under regulation (aggressive margin negotiations ahead)
- Regulatory variations between all provinces
- E-commerce vs government controlled store sales (distribution costs)
- Who survives? Large producers vs mid and small producers?
- Retail sales will NOT be the same in terms of profitability as Medical sales.
Given that even the best of the best in this space is still bleeding money and legalization is but a few months away, our recommendation is to go in with eyes wide open. Look well beyond today and out to the horizon. Ask yourself, would you have rather been a long-term holder of Apple or Microsoft or Canopy? What really has had a longer and disruptive benefit on the future of mankind?
Don’t hesitate to contact for new and exciting ideas to take anyone’s portfolio forward into the coming decades.