Stock downturns are always difficult periods to navigate. But cannabis stocks have a key advantage over other sectors when the markets take a hit. Here’s what it is…
Last week one of our fellow members, Michael S., asked about a major stock market downturn and its effect on cannabis stocks. You can read my answer to him here.
But his question was so good, and apparently so timely, I thought it would be useful to go more in-depth about the subject for all of our members.
The world’s stock markets are under pressure right now. The U.S.-China trade relationship is the big news, but Brexit will doubtless pop back up as a subject, as will slowing growth in Germany and any number of other subjects.
How will cannabis stocks do in a global stock downturn? I’ll give you the bad news first, but I promise the good news will shortly follow.
The bad news is that a global stock downturn will not be kind to cannabis stocks.
We learned that last year, when stocks declined precipitously toward the end of the year. Cannabis stocks came down too – in fact, some declined by 50% or more.
That decline occurred because during highly uncertain times, investors tend to want to reduce risk. They sell anything with any risk to it and gravitate towards investments with less risk. They sell stocks, but the riskier ones go down further and the ones with less risk – food and beverage stocks, for example – go down less. They sell corporate bonds in favor of U.S. treasury bonds, but the riskier corporate bonds go down further than the safest ones.
And right now, most investors consider cannabis stocks risky. And in some senses they’re right – at least in the short term.
What Investors Worry About
It’s true that Canadian revenues could be disappointing as regulators try to find just the right balance between keeping cannabis from being attractive to children and keeping the products interesting and good enough to thwart the black market. Massachusetts could continue to be too slow in approving recreational licenses. Congress could fail to pass the SAFE Banking bill I’ve been writing to you about.
So since many investors see cannabis as a risky sector, they sell the stocks.
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Cannabis stocks’ current status as risky is kind of ironic, because in a few years when cannabis is normal in most states, Canada has resolved its problems, and more and more countries have legalized cannabis for medical or recreational use, cannabis stocks will be less risky than other ones.
Cannabis usage is pretty recession-resistant, just as alcohol and cigarettes are. So when that time comes, investors will be flocking to the same stocks they fled from during prior market turmoil.
That brings us to the good news.
How This Story Ends
We know the long-term outcome of the cannabis business and we’re looking to that long term – not a short-term risk reassessment by investors concerned about China and tariffs and things that do not affect most cannabis stocks at all, even in the short term.
That long-term outcome is that publicly held companies will control the lion’s share of a business that will be larger than the largest current estimates of its size.
Since we know the outcome, we can ride out these short-term dips. In fact, we can use the dips to add to our positions in the best cannabis stocks. And that’s exactly what we should do. And for those who haven’t taken the dive into cannabis stocks yet, brief downturns are a perfect time to get started.
Some of the more active traders among our members have asked me why we don’t simply step out during these stock market dips – sell some positions and wait things out.
I don’t give individual investment advice, and you’re certainly free to try to do that, but I think it’s a mistake.
We never know when the next great catalyst sending cannabis stocks higher will happen. That SAFE Banking Act could pass during an overall market downturn. Illinois or New York or New Jersey could make recreational use legal. The federal government could even remove cannabis from Schedule I of the Controlled Substances Act.
You don’t want to be on the sidelines when that happens.
For some of our newer members, this is the first significant challenge to global stocks since you began cannabis investing. Our longer-term members remember the pain of last November and December and they remember what I told them then, and what I’m telling you now.
Stay the course. If you’ve got some extra cash, use any downturn to buy some more shares – maybe just a few a week.
In just a few months, you will be glad you did.
Executive Director, National Institute for Cannabis Investors
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12 responses to “The Advantage of Knowing How the Story Ends”
May 15 2019