A Response Client Questions about Crypto and Marijuana Stocks

First, we are very aware of Canopy Growth Corp. We initially researched Canopy late 2016 with the mind to short the company. Canopy is one of a hundred stocks that got a lot of attention this year due to the Canadian Governments move to decriminalize/legalize marijuana. 

You should understand, in situations like this where there is a new market being created, there will be many people/companies that attempt to capitalize. However, inevitably there will only be a couple of winners (maybe only three of the one hundred stocks mentioned earlier) and the rest will lose and lose big. This sort of thing happens over and over. A quick Google search will show you that there were over 1800 car manufacturers in the US from 1894 – 1930. Today there are about 30.

As you are aware, our investment strategy is to buy well run, undervalued companies and hold them for a long time. Given the space that Canopy is in and the fact that it is a very new space, it is hard to know which companies are well run, undervalued, fiercely competitive and will come out on top. At this time, we feel it would be more like gambling than investing. 

Although this past year appeared to be a good one for ‘investors’ in the medical marijuana/weed stocks… those gains were short term and made on speculation that the Canadian government would legalize marijuana and that ALL of these companies would be able to sell to the public. However, we now know that the Government plans to sell marijuana through the LCBO, which means many of the current dispensaries will be out of business soon, as will many of the suppliers of those dispensaries UNLESS they get a government contract to supply the LCBOs. Only the companies that are supported by the government will survive and knowing which company(s) that will be would (should) be a very well-kept secret until the contract is awarded.

In short, at this time we would currently not invest in these marijuana stocks and suggest that you should not invest in them either.

Second, no, we (and by extension you) are NOT involved in any cryptocurrencies (crypos). Like we mentioned above, there is a lot of attention in this new market, and in the very recent term many people have benefited from most other’s lack of knowledge and excitement. I am not sure if we have ever spoken with you about why we do not invest in commodities (such as gold or cryptocurrencies). But the short story is that when you buy a commodity (as opposed to equity in a company), you are betting that someone will pay you more for that commodity in the future than you initially paid for it. The value of stocks however is in part based on how that company is run and therefore can change based on how profitable or productive that company is. In summary, the value of a commodity is based on perception, and the value of equity in a company is based not only on perception of that company, but also tied to the value of goods/services that company provides.

We have been paying close attention to what is happening with the cryptos, and we do see the utility in this form of currency. As well, we believe in the technology around it (Block Chain). However, we also believe that many cryptocurrencies are currently caught up in a bubble and are trading at a much higher price than their actual fundamental value. There are a lot of people in this space capitalizing on the hype and excitement surrounding cryptos, while also taking advantage of the average investor’s ignorance in the technology. While it is true that many people have invested in it recently and made handsome returns, it is similar to the marijuana companies in that it is presented as more of a gamble at this point in time than a true investment as there are still too many unknowns.

So, in short, again we are not investing in any cryptocurrencies and we suggest that you should not be investing in them either.

In conclusion, there is a lot of attention and excitement surrounding these investments and while on the surface it seems like a good opportunity, there is a lot of hype and “fear of missing out” happening. History shows that when this is the case, it is generally NOT the time to invest as it may be indicative of a bubble. We at Tralucent do well because we do our own analysis and valuations, and from this perspective these assets do NOT look like a good investment. We believe both these types of assets are trading at inflated levels and do not score well on any measure or analysis of value. Long term growth is how you should think about investing, and while these investments very well could do well on a short-term basis, there is no real comfort that they will be around or valuable in the long term. 

One last thing we continue to stress to anyone we meet, as well as each other daily… PLEASE ALWAYS REMAIN CAUTIOUS ABOUT ANY SOURCES OF INVESTING ADVICE. We believe that your friends are very smart and well intentioned, but unless they are Warren Buffet or someone with a long track record of successful investing, you should probably not put a lot of weight into their advice/suggestions. Thank you for your questions, we always love waxing poetic about investing, and please don’t ever be shy about asking any questions in the future. If you want any more explanation on this subject, or on anything else, do reach out again.