How To Avoid Losing Your Shirt on Cannabis Stocks

James West

The cannabis industry’s rise and fall is reminiscent of the Dot Com era in a lot of ways. But the carnage being inflicted mercilessly on investors in the space is nothing compared to what happened back in March 2000. It was estimated that by 2002, US$5 trillion had been vaporized in the dot com meltdown, incredibly more than cannabis ever experienced.

But cannabis is way different then tech.

Cannabis is a commodity crop. Cannabis yields medicine and recreational intoxicants, as well as fibre for structural materials, seeds for oil, and even paper. Its an industrial crop that can be increased or decreased in the span of a season, and the fact that it became the next “it” thing is a miracle of modern markets.

Because cannabis can be turned on and off within a few months, predicting how much will be available for sale is impossible. Tonnes and tonnes of hemp that was envisioned for the CBD industry have been abandoned in the field because there is too much of it in every state in the US where it is grown.

The cannabis industry is so utterly dysfunctional that nobody appears to be able to make money from it at this point. All the blame being heaped on governments for restrictive advertising, products, labelling and growing formats is only partly responsible for the dismal revenue being reported by cannabis companies on both sides of the border. It is the sheer excess of cannabis that has resulted in broken value streams, even while the industry itself describes itself as undersupplied.

Two key factors that have destroyed any hope of market share dominance by any single brand: the black market, and home growing.

I, for one, love growing buds and always have my permitted 4 plants going in a tent. The herb is superb. Why would I bother buying any from a dispensary ever? My grass is clean and fresh and is exactly the CBD/THC ratio I most enjoy.

The attempt to try and turn cannabis into this hip new product where you consume one strain for work, and one for creating, an another for sleep, is all marketing to try and get consumers to smoke more weed than they need to.

Cannabis has serious long-term or constant use implications for daily energy levels and mental acuity. Being high all the time – or even half the time – is not going to be without its impact on your productivity and creativity.

But the oversupply of cannabis reflects the other oversupply that has crippled the market: too many cheap shares.

One doesn’t need to fret and twitter over the corrective action now in the stock market. The stock market is functioning exactly as it is intended: wealth is being transferred from the novices to the pros. Market participants are predators on each other in the zero sum, dog-eat-dog world. If there are too many shares out relative to the appetite for investment, the whole sector goes down.

That’s what’s happening folks, and it’s as natural as butter from udders.

The key to understanding the cannabis market is the same as it is to understanding the stock market: supply and demand determine both price and value.

That’s it.

James West

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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