Todd Harrison: A Conversation About Investing in Cannabis
Some fresh thoughts about the legalization of marijuana.
The following is a portion of a transcript of a recent interview given by Minyanville Founder Todd Harrison. The full interview will be made available shortly.
Can you provide a quick explanation of who you are, what you've done, and what you are doing now?
My quick bio is here. That should save us some time. In terms of who I am, that's a bit more involved but I would answer that I'm a husband, step-dad, and father who has spent the last 14 years attempting to effect positive change through financial understanding.
You made a strong statement about cannabis stocks being the theme for the next 10 years. Can you expand on this?
Yes, that statement was made in December 2012, and we're seemingly on our way. The thinking behind it -- that cannabis was my single best investment theme for the next decade -- is pretty straightforward. 1) Tax revenue: With recreational sales taxed at a higher rate than medicinal sales, cash-strapped states are incentivized to follow Colorado's lead. 2) Crime reduction: Prisons are overcrowded and the system is clogged. Mainly, this is a classic case of "follow the money," because a LOT of people will get rich and the government wants its fair share.
How does the fact that these are mostly "penny stocks" come into your decision-making process?
It depends on how you look at it. There are a lot of good ideas floating around and there is much to learn about the industry. This is a time to educate ourselves about the various applications and ancillaries, and identify profitable pathways. This will be a long-tail investment theme in my view; as with any investment, you have to do your homework. With that said, and as a matter of course, I tend to steer clear of penny stocks as the odds aren't in your favor as a small investor.
What about the conflicts of the promoters and those who are unscrupulous having influence over these stocks? Any advice on how to weed out (no pun intended) those who are legitimate vs. those who are just set up for the hype and pump-and-dump?
For as long as there has been money and markets, there have been people trying to manipulate them, and the truth is you can never really know (see Enron, Madoff, 2008). What I can offer is that right or wrong, institutional money won't invest at scale until they're able to cover their own asses, which means research coverage on Wall Street. I'm not saying that model works; I'm just sharing what it is, and we're already seeing it take root with stocks like GW Pharma (NASDAQ:GWPH). In time, there will be enough "green-chip" cannabis companies to build a legitimate ETF and that will likely provide some diversification for investing in the theme.
The SEC issued a warning recently regarding cannabis stocks. What are your thoughts on this?
As well they should have. The average investor is at risk, perhaps now more than ever -- this isn't specific to cannabis stocks but it certainly includes them. The fact that the mainstream media is just recently picking up on the legalization theme -- with specials on CNN, CNBC, etc. -- and as it "clicks" in the mindset of the masses, there is a natural inclination to profit from it. I think the SEC did the right thing, because the temptation is certainly there to dive in to the "new theme."
Are there any groups within the cannabis stock group that you feel have greater potential to outlast others, and why?
I'm partial to the periphery vs. the growers. The latter has too much regulatory risk -- it violates Federal law -- and by the time growers achieve scale, corporate America, particularly big tobacco, will bogart the space. Of course, some well-positioned growers will be part of the consolidation, so that's good. I think the food chain is a better, and relatively safer, bet. Hydroponic products, vaporizers, even the edible space, that sort of thing. And I think products or services that measure or monitor the potency of particular cannabis products or strains will do well.
While we're still early in the longer-term investment theme, we're not in the first inning either. Much like the Y2K bubble and bust, winners will emerge and flourish and others will be toe-tagged and left for dead. It's worth remembering that many of these stocks have already rallied upward of 1,000%, and one should be smart about the allocation of speculative money as we continue to educate ourselves on the space. Only invest what you can afford to lose, and sync your time horizon with your risk profile.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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