Financial Geekery

Marijuana stocks -- one more round

January 27, 2019

It's been a year since I wrote my post on bitcoin, and I was planning on writing a follow-up to talk about what's happened since then. However, I've found that I'm having the same conversations I used to have about bitcoin, but this time around marijuana stocks. Apparently, some messages bear repeating! So if you read that other article, this one's going to sound really, really familiar. Lazy? Maybe. But sometimes you just have to say the same thing over and over again until the point is driven home!


So, what to do? Read on.

 

Should I invest in marijuana stocks?

 

Good question. In theory, though, it should be simple: does it fit with your investment policy? If not, you need to create one first, and then come back and ask the question again. 

 

No, I'm serious. You can read Seaborn's articles on investment policy statements, but for now, just know that an investment policy is a systematic way of figuring out what you should invest in. It takes your goals into account, and your risk tolerance and risk capacity, and your time and skills (or your financial advisor's), and best practices, and due diligence. It's a framework that balances rigidity with flexibility in a way that's personal for you. It reminds you of what you know to be true, about money, the world, and you, to help you make good decisions in precisely such situations as these.

 

An investment policy often outlines your asset allocation: how much cash you should have in savings, and how much should be invested in stocks, bonds, domestic or international securities, large-company or small-company equities, real estate, commodities, etc. Given that marijuana stocks are equities, they can certainly have a place in a standard asset allocation. You can't invest directly in marijuana companies in the US, but assuming international stocks have a place in your IPS, then you could certainly set aside some of them for TLRY or CGC or what-have-you. And if you look at CGC's stunning growth since 2014, you may be tempted to put a whole bunch of chips on it.

 

But let's remind ourselves (again!) of times in the past when an investment has become untethered from reality. Tulips are the first, most famous example, from 17th-century Europe. At one point, according to a book by Charles Mackay in the 19th century, 1635 saw a sale of 40 tulip bulbs for 100,000 florins (or Dutch guilders, and you Princess Bride fans are suddenly having a flash of realization, aren't you?). That's approximately $1.4MM US dollars. Needless to say, when that bubble burst, a lot of "wealth" simply vaporized.

 

Lest you think people have gotten smarter, the 20th and 21st centuries saw their share of bubbles. An ounce of gold fell from $1900 in 2012 to $1100 in 2015. Median sales price of homes in Vegas went from $300,000 in 2007 to $130,000 in 2009. A share of Enron stock was $90 in 2000 and cratered to $0.21 in 2001. The list goes on and on and on -- sometimes the market value of something is, to put it succinctly, wrong. (We'll talk about what that means regarding efficient market theory another day.)

 

So does that mean that marijuana stocks are a bubble, and the Investment Nazi says "no MJ for you"? Not necessarily. And it's certainly not a bubble the way that bitcoin was (ever hear of "pump and dump"?). As I mentioned earlier, marijuana companies are straightforward, publicly-traded, product-making companies, only different from Johnson & Johnson or Pfizer in that their product isn't legal in many parts of the world. This, in turn, means that their valuation will fluctuate wildly depending on the likelihood (or lack thereof) of legalization in any given place. This means it's a volatile stock, one with large potential upside and large potential downside, but probably one that can have a place in your portfolio. In fact, if you have any kind of international fund, you probably already own some CGC already! 

 

But if you have that gambler's itch, and you're just sure that legalization will happen sooner rather than later, then you can set aside part of your portfolio and call it "speculation". Perhaps you have 5% set aside in general for "Vegas money", with no more than 1% of your portfolio in any given single investment. So it might be 95% diversified stocks, bonds, and real estate, and 1% each of investments you just think might take off, like marijuana or Bitcoin (or Tesla or gold or energy companies or tulips). (NoteI'm not making a recommendation for or against buying marijuana or Bitcoin or gold or energy companies or tulips. It's just a hypothetical. Keep your shirts on, SEC.) Once one of those 1% assets grows beyond a threshold, say 2%, you sell off back to 1%. (And if it falls to 0.5%, you buy back to 1% or perhaps consider replacing it entirely.) This allows you to capture growth in a methodical, systematic way, without potentially torpedoing your portfolio. Will it outperform a portfolio that's 100% non-speculative? Maybe. The odds are against it, but you could roll a winner. 

 

The point here is: before you decide to jump on a bandwagon, create a system. Once you have a framework for making this kind of decision, it becomes much easier -- and much less prone to blowing up your financial future!

 

By the way:

  • The price of a bitcoin when I wrote that article on January 30, 2018 was $9,914. The price of a bitcoin today? $3,563. 

  • The price of an ounce of gold when I wrote that article in August of 2011 was around $2,000. An ounce of gold today is worth $1,283.

  • By the same token, the price of 100 shares of Vanguard's Total Market ETF, representing the sum total of the US stock market, was worth around $6,000 in August of 2011. Now it's worth $13,520.

My point isn't that I have some sort of crystal ball. Rather, it's this: whether it's marijuana, or bitcoin, or gold, or real estate, or tulips, or anything else that you feel is a "sure thing", remember: it isn't. 

 

Oh, and if you've gotten all the way to the end of this and have decided that you like the idea of a systematic IPS (and don't have one already), here's an article to help you get started! And if any questions come out of that, leave a comment below or drop me a line!



Britton is an engineer-turned-financial-planner in Austin, Texas.

fee-only approach to financial planning
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