There’s no getting around it – Cannabis stocks trended downward starting soon after the October 17 legalization of cannabis for recreational use in Canada. Some stocks declined significantly.
That’s a classic instance of a “buy the rumor, sell the news” decline, where investors took profits after months of steady gains.
This is actually good news. It may not have felt like it, but I’ll tell you why it was.
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Last week, I was with my colleague and legendary resource investor Rick Rule while on the West Coast for speaking engagements. Rick said that every stock he had ever bought that eventually went up by over 1,000% had declined before it got there.
Rick also told attendees of Warren Buffett‘s lesson that the way to make money in the stock market is to profit from the difference between the value of an investment and its price. The value and the price come together in the long run, but they can differ by a lot in the short run.
That’s where opportunities happen.
He also recalled Bernard Baruch‘s maxim, “Don’t try to buy at the bottom and sell at the top – It can’t be done, except by liars.”
All of Rick’s wisdom adds up to this important point…
Get In Early Or Be (Too) Late
If Baruch’s adage that no one can consistently get in at the precise bottom on investments is true – and it is – the only choices are to be early or to be late.
An investor who is late can often be too late, missing out on a big portion of a stock’s gain. An investor who is early will often suffer some short-term declines before making a lot of money. As long as you are right about the value of a stock, such a decline works as a short-term increase in the difference between the stock’s actual value and its lower price. And that is OK.
And in cannabis stocks, nothing about the value is different today than it was on October 17. If anything, the true values are higher in some cases because cannabis stores in Canada are selling out of product. In addition, U.S. demand is growing faster than most predicted, more countries are allowing medical cannabis (the United Kingdom joined the list earlier this month), and research into the healing potential of CBD is turning up more positive data that will only increase huge potential of that market.
For these reasons, big companies still want in.
So, with the same or higher value and lower prices to actually buy the stocks, the difference is larger now than it was a few weeks ago.
That makes now a great time to buy.
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That’s exactly what I’m telling my Cannabis Investor’s Report members to do. I’ve been telling those members to buy my best stock picks at increments of one-quarter of their total desired state at a time. That means they’re now facing the best prices on their third and fourth quarter stakes.
I Don’t Recommend Protective Stops
The recent market decline also demonstrates why I do not place protective stops on portfolio positions.
In traditional markets, with lots of institutional investors and Wall Street analysts carefully poring over every stock, a price decline can sometimes be a sign that you are wrong about the value of a stock. This makes a good “sell discipline” important.
In cannabis stocks, that so-called “smart money” is still on the sidelines. They’re waiting for permission from the government or their boards of directors before getting in. That means that a decline isn’t a sign of anything except a decline.
In the past three years, Canopy Growth Corp. had five declines of 30% or more. That would have meant five chances to sell a stock – one that was on its way to a 1,064% over that time.
As stock positions increase in value, I will start recommending to my Cannabis Investor’s Report members adding some partial stops and partial sells to protect gains.
For now, a decline is exactly what we want and expect as we build our positions in the best cannabis stocks in the world.
Thanks for being an important part of the National Institute for Cannabis Investors,
Executive Director, National Institute for Cannabis Investors
4 responses to “When a Downturn Creates Good Luck, Strong Values”
November 01 2018