Trends Investors Should be Sceptical About in 2018

Trends are a big deal in the investing world. Even if you aren’t going to pour over mounds of financial data sometimes trends are all you need to know about to successfully invest. Lots of people have beaten “experts” because they followed a trend rather than become intimate with the financial fundamentals.

It should be no surprise then that trends also dovetail nicely with investing hype and stock market bubbles. The trend is your friend only so long as it still makes sense. In fact being able to understand why the trend is occurring maybe the only thing that saves you from being an apocryphal lemming running over an apocryphal cliff.

In the movie The Big Short, Christian Bale’s character is shown to be a maverick who correctly bet against the housing market. But his bet, notably, was based on reviewing all the underlying mortgages that made up the mortgage backed securities and how the presence of sub-prime mortgages and rising borrowing rates tied to grace periods in the investments would lead to a housing collapse. There were a lot of people on the housing boom trend, but not many on the big short side. What separated them was knowledge about fundamentals.

Trends represent an essential aspect of investing that we typically discourage; betting on outcomes when the fundamentals are opaque or in dispute. Here are a few that we think investors should be wary of.

20160903_LDD001_0Self Driving Cars: In reality you aren’t likely to come across too many investments in this space. I’ve seen some through venture capitalists, but as a growing field and surrounded with lots of hype there is every reason to believe that firms will increasingly be looking for investors outside the venture capital space.

In principle self driving cars sound awesome and could radically change how we live and get around. Lots of companies are excited by the prospect of a self driving vehicles, including insurers and freight firms. However the entire enterprise depends on being able to eliminate the human component completely. That seems less likely and anything short of that (like having a driver always ready to take back control at a moment’s notice) will make the biggest benefits disappear. Beyond that there are also numerous other aspects that haven’t been considered. The cars will have to stop for all pedestrians, so what’s to stop pedestrians from just walking into traffic knowing that the cars will always stop? Or more terrifyingly, the potential for hacking cars and creating accidents with malware?

Those kinds of hurdles don’t get much attention in the fawning media coverage of self driving cars, but they represent the challenges that need to be comprehensively addressed before investors come to believe that this trend is safe and reliable.

Marijuana Stocks: I’ve written about the concerning hype regarding marijuana stocks before and haven’t had a reason to change my opinion since. One of the biggest reasons that investors should be excessively cautious regarding marijuana is because its still illegal. One of the lesser reasons is that as it transitions into a regulated drug, it will be more likely to be treated like cigarettes and alcohol.

In Ontario it has raised ire of prospective sellers that the LCBO would like have control over the sale of pot. In the United States, where marijuana is a Class A drug and regulated by the federal government, it was still unclear whether the federal government would get involved with states that had voted to legalize the drug. Yesterday the Attorney General, Jeff Sessions, announced that federal prosecutors will be allowed to decide how much energy to put into federal enforcement, rescinding the Obama era policy of staying out of the way of states the vote to legalize its sale.

2860534_1280x720This kind of regulatory uncertainty should give investors real pause when they consider which companies to invest in. Most marijuana growers have no profits and only debt and are betting on big returns once markets open up. They would not be the first companies to badly misread what the future holds.

Bitcoin: Whatever is attracting people to Bitcoin at this stage, most serious investors are keeping back. The common chatter is that no one is sure what is driving the price up except demand. Bitcoin is meant to be an alternate currency, one protected by the blockchain and whose algorithm should limit the physical number of total bitcoins in the world. While that may all be true, investors aren’t treating bitcoin that way. Instead prices have fluctuated violently, reaching peaks of $20,000 USD and falling sharply to $13,000 USD. Currently its trading at just over $14,717 USD.

CaptureCurrencies that are subject to incredible volatility are not normally appealing to investors. In fact stability is the key for most currencies, and the Bitcoin phenomena should not be an exception to this. Bitcoin’s intellectual champions point out that it is a versatile currency and a store of value, but if you were a retailer how would you feel accepting payment from a currency that can drop 30% in one day? As a consumer it also would trouble you to pay $5 worth of bitcoins one day only to find out it was worth 1000% more a month later. Currencies work because people will readily part with it for other goods confident that the value is roughly consistent over time.

Bitcoin, and by extension other crypto-currencies lack this basic property, and instead operate in an expensive, unregulated market with little oversight. Investors should give extensive thought as to whether Bitcoin represents good value for money.

As 2018 unfolds, no doubt there will be more ideas that will seem credible but may have little to offer investors except brief excitement. Scepticism remains an investors best accomplice when assessing excitement and investment hype.

Should You Invest In Marijuana?

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. – Mark Twain

Legal marijuana is undoubtedly having a moment. Since Colorado first paved the way in November of 2012 to legalize recreational cannabis, efforts to move the drug into the mainstream of society have gained real momentum. Even with the election of Donald Trump, seven states voted to legalize either recreational or medical marijuana this past month. Here at home, Justin Trudeau campaigned on the promise of legalizing marijuana “right away”, adding to the growing movement of normalising the drug.

The debate over marijuana has been all but won by the champions of recreational use, certainly from moral and scientific standards. All that is left is the actual laws that must be struck down, and as we near that day I have been bombarded with questions from my clients about whether it is a good idea to buy some of the publicly traded marijuana stocks available on the market. So is it a good idea?

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My answer to this question is typically Canadian: “It depends…”. The question that I ask investors looking for advice is what purpose would this investment serve them in their goals? Driving the excitement for investing in publically traded grow-ops are a heady brew of excitement over the possibility of legalization, reports of weed tourism and a weed economy, and the news stories about how quickly the stocks have been appreciating.  This mix of positive media have given the story of investing in the “pot business” a veneer of inevitability; that the price of the stocks will rise for some time.

In fact, according to Vice, just last week trading had to be halted on several medical marijuana companies on the TSX because their price had appreciated so quickly in a single session of trading that it tripped a “single stocks circuit breaker.” The enthusiasm for these stocks is real, but does that mean its a good time to buy?

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This is the stock chart for Canopy Growth, as of 2:30 on November 22.

First, what are the risks? The most glaring is that weed isn’t actually legal yet and continues to face significant uphill challenges to be made so. Though individual states have voted to end its prohibition, pot is still considered a Class A drug in the United States, and while Barack Obama had told his Attorney General to leave states alone that had allowed legal recreational or medicinal use of the drug, it still falls under the purview of the Department of Justice. Notably Donald Trump’s appointment to this position is by an avowed opponent to any form of marijuana legalization. How long the federal government stays out of individual state’s business is now up for debate.

The knock on effect of the appointment of someone like Jeff Sessions could be felt here too. Though Canadians might like to think that our government policies won’t be impacted by that of our neighbours, the United States will be unlikely to look fondly on their neighbours to the north legalizing a drug that they are working hard to stomp out. The impact at the border on traffic and trade may be enough to dissuade the government from moving ahead too aggressively with legalization.

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But even if we do get to the promised land of legal weed, that still doesn’t mean that the market will be good for marijuana companies. One of the arguments for legal weed is that weed is no more dangerous than cigarettes, which is true, but just look at how we have treat tobacco. Over the last 50 years we have been putting endless pressure to discourage and end the use of tobacco. You can not smoke inside, on a patio, in private clubs,  or in a car with children. Cigarettes can’t be displayed and all packages must come with both graphic and written warnings about the impact on your health. In the very near future there may be no branding on packages at all.

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Lets face it, this is subtle by government standards.

Against these challenges, medical marijuana companies are expanding rapidly. Companies banking on a future of recreational use with few regulations are borrowing money to expand their operations to meet both rising demand and expected demand. Since the companies are growing many have never turned a profit, the current surging stock price really represents a bet about the future, and not about the current financial health of the company.

Take Canopy Growth, a medical marijuana grower that became Canada’s first “unicorn” in the sector, valued in excess of $1 billion. According to a Reuters survey of analysts, the company is considered a “Buy” and the Globe and Mail has some positive views of the company, largely that it has good stock momentum and low relative debt. A surprise positive earnings report per share last week gave the company a significant boost in terms of share price. So how much has it made? Nothing. The company has a negative PE and no earnings to report on.

And so we return to the original question, is it a good idea to buy publically traded marijuana companies? It depends; depends on whether you are comfortable with risk, with companies that have yet to turn a profit and with possibility that you could see steep losses as well as happy and rapid gains. It depends on what role you expect any of these stocks to play in your investment goals. Is this money for play, or is it meant to be an integral part of a retirement plan? If you as an investor can make peace with those realities, then maybe these stocks are for you.

These are the opinions of the writer, and not necessarily reflect those of Aligned Capital Partners Inc. Aligned Capital Partners Inc. is a member of IIROC and CIPF.