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September 21, 2018  
Warning: This is going to be a real
buzzkill to Cannabis stock investors 

 
 
Whether or not it's a good idea to invest in pot stocks, or should I call them by their more respectable name "cannabis stocks", isn't really the point of this post. Certainly, what's going on behind the meteoric rise in pot stocks generally has to do with the medicinal benefits of cannabis and the legalization's popping up globally that are expected to make pot-related products more safe, effective, and accessible. That's the bullish case.
 
The real point is that when you mix an overabundance of enthusiasm with an offbeat asset class that has few investable choices for investors looking for the next big thing, you get an asset bubble. In a broader sense, this flash rally in pot stocks debunks the idea that the Federal Reserve's interest rate hikes are taking liquidity out of the financial markets. Certainly, this is corroborated by the 3 major averages all trading at or near new highs, with the DJIA having last performed that feat about 8 months ago. Excess liquidity is still in the system, which acts as fuel for asset bubbles.
 
This time just one year ago, something very similar was taking place with crypto assets and blockchain. The three major stock market averages were setting new highs back then too. Bitcoin became a part of investor vernacular overnight. The meteoric rise of Bitcoin and anything crypto-related was unlike anything we've seen before. Then the major stock market averages peaked last January on concerns over rising interest rates and inflation. Bitcoin plunged in value. The crypto-bubble popped, leaving investors with massive percentage losses. Now, regarding the companies that actually have the ability to develop crypto/blockchain products and services, like GOOGL, AMZN, IBM and JPM, it won't be enough to move the needle anytime soon for these giants, which is why investors migrated to the small, speculative niche plays in the first place.
 
But hope springs eternal, which is best exemplified by Canadian-based cannabis stock Tilray (TLRY) rocketing higher by 1,500% since its IPO just this past July - only about 2 months ago! Never mind that it dropped by more than half since hitting 300 a few days ago. Regardless, early investors are still up huge.
 
Everyone has to learn the same lessons as the generations before them. It's like some cosmic punishment that has doomed us to repeat history, even if history is being made at breakneck speed. It was my generation, gen X, which was the force behind much of the internet stock bubble. The Robinhood App, the brokerage of choice for many millennials, had to suspend trading in pot stock Aurora yesterday because it couldn't handle the surge in trading volume. We humans are always bouncing between greed and fear, which is what sparked the idea to write this. With two recent asset bubbles in rapid succession, crypto and cannabis, I put together my thoughts to help everyone see clearly through the haze (pun intended) and become better spotters of future asset bubbles. I think we could all do a lot better in that department. Here goes:  
  1. It takes a massive amount of money and expertise to bring a legitimate, FDA approved product to market. Leaders in this space will no doubt emerge, but it probably won't be in the small players you're trading right now. Cannabis-based drugs probably won't move the revenue needle anytime soon for large drug companies, which are the ones who have the funding and expertise to develop new FDA approved products.
  2. If farmers want to grow marijuana on a commercial scale, it could become a surplus crop fairly quickly.
  3. Most of the cannabis content that you read is being pushed by marketers who have a hand in your back pocket.
  4. If a company with no history of earnings and revenue changes its name to something "cannabis" related and the stock goes up just on that alone, you are welcome to trade it as long as you realize it is purely for speculation. Remember RIOT Blockchain and Long Block Chain? You can look them up on your own time and decide for yourself if these were worth taking a shot on. Just know that the former was a biotech and the latter was an iced tea beverage co.
  5. Companies that start out today as "pure cannabis plays" will take years to develop and will require many rounds of capital raises to finally turn out a viable product.
  6. Imitators will come out of the woodwork. All sorts of companies will miraculously appear that are involved in the pot business, all with a great story to tell. Telling fact from fiction will be nearly impossible. But all of the supply of pot stocks will quickly saturate demand.
  7. By the time you hear about these opportunities, you're most likely helping someone else sell with a huge profit.
If you were lucky enough to be in one of these hot pot stocks before it took off, then I'm thrilled for you. If you feel you want to trade these stocks with money that you can afford to lose, that's fine. But if you're hastily buying these stocks now with the intent of checking out their fundamentals later, sort of like shooting first and asking questions later, then you're just mindlessly following the bullish case and ignoring the bearish case.   
 
 
 
 
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Thank you for taking the time to read this!
Mitch
 
 
I opened ClientFirst Strategy, Inc. because I believe that the only way to help my clients potentially achieve their goals is by offering unbiased advice & investment management expertise. To my clients, thank you for your continued vote of confidence. If you are not a client but would like to explore the possibility of becoming one, I invite you to call me directly, visit my website, join my email list, and/or connect with me on social media.      

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All the views expressed in this report/commentary accurately reflect our personal views about any and all of the subject securities or issuers and no part of our compensation was, is, or will be, directly or indirectly related to the specific recommendations or views we have expressed in this report. This material is not intended as an offer or solicitation for the purchase of sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from securities or investments mentioned in this report may fall against your interests, and you may get back less than the amount you invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. You should consult with your tax adviser regarding your specific situation. Diversification is a method of managing risk and doesn't protect against loss in a down market. 
  
  

Mitchell O. Goldberg, AAMS, President | Investment Professional

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