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Invest Well. Live Well: The fear of missing out

Kids often want to have the latest and greatest gadget and are often motivated by the fear of missing out. Lately, it seems many investors have the same affliction when it comes to cannabis stocks.

Kids often want to have the latest and greatest gadget and are often motivated by the fear of missing out.

Lately, it seems many investors have the same affliction when it comes to cannabis stocks.

The cannabis industry has been nothing short of spectacular to watch, with lofty evaluations and a roller-coaster ride. Because stories are circulating about quick and easy profits, people are eager to follow suit and invest. We would like to highlight a few key points.

• Levels of risk: Investment risk typically factors complexity, liquidity, volatility and the potential for loss. Risk can be categorized into four groups: low, medium, high or speculative. The cannabis industry is still in its infancy and, in our opinion, should be considered high risk to speculative. What portion of your portfolio are you willing to allocate to the potential for not just gains, but significant losses?

For example, on Sept. 19, Tilray (TLRY) shares rallied, were halted five times and peaked at $300. Two days later, they plunged 59 per cent, to $123. More than 30-million shares changed hands in one day, trading as much volume as Amazon, a company worth nearly a trillion dollars.

Risk is not limited to the cannabis industry. Bitcoin was the rage in 2017, peaking at US$19,187 Dec. 16. At the time of this writing and according to bitcointicker.co, it now trades at about $6,604, for an incredible 66 per cent drop.

No one expected to lose in the dot.com bubble of 2000, when internet and technology stocks were all the hype. By November 2000, the tech wreck hit. According to Wikipedia, most internet stocks had declined in value by 75 per cent from their highs, wiping out $1.755 trillion in value.

• Sky-high evaluations: We believe in fundamental analysis, which is a technique that attempts to determine a security’s value by focusing on factors such as sales, earning, debt, other financial ratios and qualitative factors.

It is hard to quantify the value of the industry, let alone a company. According to Thompson Reuters, Canopy Growth (WEED) is currently valued at over $14 billion, but has yet to generate one dollar in earnings. Here are a few comparables that help illustrate fundamental differences:

Investing

 

Essentially, the stock market trades based on the expectations for future profits. One could conclude that Canopy Growth is expected to grow sales and profitability at an incredible rate.

The danger is if a stock misses expectations, it typically sells off violently.

• Have a plan: The danger in jumping into anything without a plan often leaves one vulnerable to emotional decisions. We find most investors have not thought about multiple entry points, exit plan and basis for expected returns. As a suggestion, if you are successful in choosing a winner, you could sell your initial investment, leaving only the profits invested.

• Banned from U.S. entry: This is a contentious space and subject to government interference. Presently in the U.S., only 30 states allow cannabis for medical applications and a mere nine states permit recreational use. Because the U.S. border is regulated federally, cannabis is illegal and repercussions can be severe. There have been reports of Canadians who own cannabis stocks getting banned entry to the United States — permanently. The same goes for those who admit to having used cannabis in the past or get caught lying about it. See travel.gc.ca for more details.

There will be winners and losers in the cannabis space. We are not saying investors can’t make money, but encourage you to do your research, know the risks and, when in doubt, consult a professional.

Until next time, invest well. Live well.

This document was prepared by Eric Davis, vice-president, portfolio manager and investment advisor, and Keith Davis, investment advisor, for informational purposes only and is subject to change. The contents of this document are not endorsed by TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc.-Member of the Canadian Investor Protection Fund. All insurance products and services are offered by life licensed advisors of TD Waterhouse Insurance Services Inc., a member of TD Bank Group. For more information, call 250-314-5124 or email Keith.davis@td.com.