Oh Cannabis

Flashback to June 21, 2018: PM Trudeau announces a legalization date of Ocober 17, 2018 for marijuana sales. I happen to be the guest host on BNN's The Street with Paul Bagnell and of course the topic du jour was the said legalization and all the Cannabis company stocks already involved in the feeding frenzy. At the time there were about 44 listed Cannabis companies on the TSX.  When Paul asked for my comments, I remarked on the number of listed companies, all with limited, no or negative cash flows and suggested that this would not end well (my well-informed opinion courtesy of my business partner Paul Tepsich's keen insight and research, in which he had stated that he would not touch this industry for investment on the cash flow issue alone). Of course speculation was rampant and we were thought of by some to be missing out.

I have not followed the story too closely, other than by virtue of news reports from time to time, but was brought front and centre to it again by a Globe and Mail story that I read over the weekend titled : "All Dried Up: How Bay Street Cashed In on The Cannabis Frenzy Before The Carnage" .

"With little access to fresh cash, Canada's licensed producers now face a new reality. They have spent years focused on financings to fund their expansions, paying little mind to positive cash flow."

"The vast majority of the companies are going to go bankrupt",said Igor Gimelshtein, the former chief financial officer of MedReleaf Corp."

 The chart of the Horizon's ETF, HMMJ (above) really does tell the story behind the emotion and psychology of bubbles.

The early excitement (left peak), the Fear of Missing Out (FOMO) (all time high peak and right peak), and the reality .

Technically referred to as a classic "head and shoulders" chart pattern.

"For all the money they made, the industry's original financial backers have now largely moved on to more promising U.S.- based companies, or are out of the sector altogether. Retail investors, meanwhile, are still heavily invested, holding 80% or more of many cannabis companies' shares".

"It is all too familiar a tale. As with so many bubbles, much of the smart money got out early, leaving behind retail investors who clutch shares with dwindling values - with little hope of recouping big losses".

Classic in many ways, but horribly devastating to those who bought in to the hype and have been subsequently crushed. 

Where was the fiduciary responsibility to those retail investors who took their advisor's advice to participate, when they were supposed to be looking out for their best interests?

High Rock chose not to participate because the industry lacked a basic fundamental. In turn, our fiduciary duty to our clients (do we want this for our own portfolios? Absolutely not!) was to assess the risk, apply it to our and our clients long-term goals and determine that there was no point in owning (investing in) the Canadian cannabis industry until real value (positive and predictable cash flow) became apparent.

That is how we boringly and methodically determine how to invest. Not because everyone else is buying into it and pushing prices higher (creating upward price momentum and the inevitable excitement). As I will always say, ad nauseum, if you want excitement, go to a Casino! If the value is not there, at some point in time, the smart money will figure it out (leaving emotions on the sideline) and bid adieu, while the more emotionally driven investors remain on "Hope Island".

We may apologize, from time to time, for erring on the side of caution, when we are uncomfortable with relative value. However, our fiduciary duty to our clients is to protect them when we see risk that does not make sense too us and to our/their long-term plans.

We are stewards of wealth, not gamblers.