Marijuana stocks are all the rage lately although second to Bitcoin if I had to guess. Everyone I talk to has heard of Bitcoin but not Canopy Growth.
I’ve been a shareholder of Canopy Growth since the $2.75 range, and have sold almost half my shares on the way up. Some people say this was the smart thing to do but the numbers say otherwise. Every time it doubles I think to myself, there’s no way it can go much higher, and then it does. Now I just don’t know what to think anymore.
Most of the professional investors including Warren Buffett would tell me to get out completely but then again if I listened to them I wouldn’t have bought this stock in the first place.
What you will always hear is that Canopy Growth and all the other marijuana stocks are overvalued. They definitely are in conventional terms. Amazon though has been overvalued since 1997 and Netflix is always overvalued as well. $1000 of Amazon stock at its IPO is now worth over $1,000,000.
It’s easy to make a judgement on existing numbers and the short-term future but it’s much more difficult for most people to see what the longer-term future holds. Once the future becomes the present though it all makes sense.
The following is an excerpt from an article written by the CEO of Netflix 8 years ago regarding short interest in the company.
You can replace “Netflix” with “Canopy Growth” and it would seem appropriate. As of right now Canopy Growth seems to be doing all the right things and would be the horse to bet on. I believe in the company and my only doubt is that shit happens. I realize Canopy Growth is not comparable to Amazon or Netflix in terms of size and market but the situation is similar — market leader in a huge new industry.
Mark Cuban said this in a video interview. He also added that diversifying will diversify your profits away. Warren Buffett said, “diversification is protection against ignorance.”
If your priority is to see a modest return on your investment in the long term then you should diversify. If your goal is to make a large return in a relatively short amount of time then diversifying will likely not get you there.
Conventional investing advice has a way of altering your perception. People who would gasp at your 1 stock portfolio would at the same time congratulate you on investing your life savings in a new business venture — go for your dreams! Putting it all into your one business is the same as putting it all on one stock. Most people would have been better off putting their money with Jeff Bezos than whatever costly venture they got themselves into.
Diversifying is recommended for every stock portfolio while the status-quo for everything else is to put all of your eggs in one basket. Who diversifies their education? How often do you get the advice to diversify your girlfriends?
I’m not recommending that everyone have a 5 stock portfolio. Warren Buffett also said 99% of people should just invest in an index fund. Most people aren’t skilled or lucky enough though to come out victorious in the stock market without diversification.
Many financial bloggers and professional investors have a bias against speculative investing. Speculating is not investing it’s gambling, they say.
Gambling is going to the roulette table and hoping you hit the 1 in 36 odds of winning without any reason other than hope or I have a good feeling. Speculating is making an educated decision based on the information available, your knowledge and life experience.
If you had put $1000 into Amazon stock at the IPO you would have over $1,000,000 today. Even $1000 ten years ago would now be over $20,000. You won’t get those kinds of returns in 30 years from buying the index or through blue chip dividend stocks. That’s just the reality.
Since the beginning of time the one who was able to see further into the future with better accuracy has always been valuable. Picking successful speculative stocks or even blue-chip stocks is a play on being able to predict the future better than others. Some people believed online shopping was going to be a thing and others didn’t. People will never put their credit card information online! It’s not likely you’ll have a good understanding of multiple industries but once in awhile something comes along that might be in your field of competency.
The majority of people are really good at following conventional rules and only being able to see what’s in front of their face. To them, if a stock doesn’t meet the criteria of being under 25x P/E and having several years of profit then it’s not worth looking at — if the company’s vision is not producing the numbers yet then it’s garbage. Home Depot was a speculative stock until it wasn’t.
It’s not fair to give the advice to never buy speculative stocks. Saying speculating is not investing is just semantics. It comes down to a matter of risk vs reward. You have to be careful though and know your limitations.
The other week while I was walking my dog I asked a woman I sort of know if she was into the stock market. She said that she wasn’t and that she just puts her money into mutual funds. “Then you are in the stock market,” I said.
It made me realize that many if not most people are okay with the idea of having money in the stock market, they’re just not comfortable with managing their own money. Having it managed professionally gives them comfort.
That guy or gal at your bank signing you up into one of their mutual funds is not an expert in the financial markets. If they were so much smarter than you in the markets they would be sitting on a beach instead of their crumby office. They’re salespeople. They get a commission and their company gets a 1-2% cut from your whole investment every year, win or lose. Easy money. In return you might make money but most of all you get the comfort of believing you’re doing what’s right.
Going through my bank’s list of mutual funds I found that the one with the highest 10 year return and lowest fee was a S&P 500 Index fund. They won’t ever push this fund though because it’s not very actively managed if at all since it just follows an index. In order to justify their 1-2% fee they have to make it seem like they’re doing something even if it means actively losing your money. 1% doesn’t sound like much but it really adds up.
I suggested to this woman that a low cost S&P 500 ETF would probably have much lower fees and a better return and that she should check the annual returns of her current mutual fund and compare.
“Nope, no, I don’t want to deal with it. I don’t know anything about that stuff,” she said. This is why financial advisers even exist. When people see their mutual fund tank or languish they don’t want to blame themselves and be confused on what to do.
The truth is you don’t have to know anything. You start a trading account and periodically put money into a Vanguard or Spyder ETF. It’s easier than online shopping.
When news gets out that Warren Buffett buys a certain stock it usually jumps up a few percent. The morning I found out he had bought billions of dollars worth of Apple stock the price went from $90 to $93. Today, close to 2 years later it’s hovering in the $180 range.
You won’t know exactly when he bought it or for how much but you can look up that stock’s price range in the quarter he purchased it. If the price is only 10% higher than the lowest price for that quarter then you may have found a deal. If Warren Buffett puts that much money into a stock he’s betting that it’s going to go up way higher than 10%.
Buffett bought all the major American airlines in the 4th quarter of 2016. By the time I found out about it all of them had gone up significantly in price except American Airlines. Again, I didn’t pull the trigger. The stock went up as high as $59 but came back down to the range of $41 where I first saw it at.
This time I pulled the trigger on American Airlines and Southwest Airlines, $41.60 and $51.40 respectively. I feel good to own some stocks that are Warren Buffett approved. This sounds like amateur hour advice but to me it’s rational. He’s done all of the due diligence for you. A stock pick endorsed by him can only be so bad.
The S&P 500 index could be referred to as the benchmark for investing returns. In order to justify managing your own money or paying someone else, your returns have to beat this index otherwise you’re better off putting your money in a low fee S&P 500 index fund(Vanguard, Spyder).
The chart below indicates if you had put your money in at anytime in the last 90 years(except in the last couple months) you would have seen a return from your investment. There were better years than others but as long as you held you would have made money.
Although it’s next to a sure thing that you will make money if you’re in it for the long term you probably wouldn’t want to pile in all of your money at once unless if the market has took a huge beating like in early 2009.
If you had piled in all of your money at the peak of the tech boom in the year 2000 you would have seen your investment get cut by close to half at the bottom of the tech bust the following year.
That decade wasn’t the best for a long term investor due to the Great Recession that followed in 2008. The index rose back to its high after the tech bust only to get slammed even worse. It’s like falling madly in love only to get heartbroken and then have it happen all over again soon after you recovered.
If you weathered the storm until today though you’re in love again. In 2001 the index at its peak was at around 1500 points and in 2018 it’s been in the 2500-2800 range.
Instead of piling in all at once a more prudent strategy would be to put smaller portions every month so that you hedge against having all of your money invested at the top. Sure, if you go all in at once you’ll more than likely see your investment above water one day but in the case presented above you would have had to wait until 2013 to see a gain from your 2001 investment. That sucks.
If the index has taken a bad beating already though it’s probably a strategic move to put in more money than you usually would. Buying at the bottom is how you get the largest returns.
A big reason why so many people don’t invest their money in the markets is because it’s something you can put off and not hate yourself for until way down the road. Many have no qualms with owning real estate because it’s almost a tradition plus you need somewhere to live anyway. Just as many celebrate the idea of marriage even with the significant failure rate. Statistically your odds at winning in marriage are about 10 percentage points higher than a typical casino game. Do you feel lucky chump? Well, do you?
Fortunately, the S&P 500 index does not care if you do not take out the garbage or if you gain 70 pounds. Like marriage, it too has its ups and downs but if you stick it out you will be victorious in the end if the last 90 years has anything to say about it.
2001 and 2008 were rough years but we pulled through baby!
What if I lose all of my money?
The S&P 500 is comprised of 500 of the largest publicly listed companies companies in America. If they fail life is over anyway.
Sure, it’s all been good up until now but how do I know the trend will continue?
The truth is you don’t know for sure but this is almost as close as a guarantee you’re going to get. There are no guarantees in life but you have to side with the most rational decisions.
How much am I going to get back in 30 years?
The answer to this is unknown but you can reasonably expect somewhere in the neighborhood of an average of 5 to 10% annually. Much of this depends on how you invest into it.
The data below shows the annual returns of the index since 1988. As you can see there are many more positive years than negative.
If this hasn’t been compelling enough because I’m just some schmuck blogger then you can put your trust in Warren Buffett. He advises that 99% of people should invest in a low cost S&P 500 index fund such as a Vanguard fund and they’ll do great in the long run. Also, when he dies he has planned for 90% of his money to be put in such a fund for his wife.