A Message To Longs (Three pitfalls to avoid)By Ted Ohashi:
Pitfall to Avoid #1: if the cannabis stocks go up for a couple of days or a couple of weeks, there will be a tendency to sell. Many investors will fall into the trap of taking a short term profit at this stage. This is natural. Over the past year or two with the cannabis stocks, investors have seen time after time that taking a profit is the best way to go. But the past couple of years has been an anomaly. Over the longer term, stock prices go up. That is why a great investor like Warren Buffett says his favorite hold period is forever. What most Pundits will say when the market turns: Market experts are like anyone else. They are highly influenced by what has happened recently. In market terminology, they will “mistrust the rally.” In other words, they will offer up all sorts of reasons why the cannabis stocks cannot go up and yet they will continue to climb. This can show up in other ways. For example, the advice will often be not to buy because the stock has just gone up in value. Wait for it to come back. At this point in the market, the cyclical low has already been made and the price isn’t coming back. This is a natural process. When the cannabis stocks are low, as they are today, there must be maximum investor pessimism toward the group. It must be so because that is why the group is low. If most investors were optimistic toward the group today, marijuana stock prices would be much higher. As we move forward and stock prices rise, the number of pessimists will decline and the number of optimists will increase. Again this is the normal, natural process. Then in three or four years when the Let’s Toke Business Marijuana Composite Index is nearer 2,000 than 500 and some individual cannabis stocks are up 500% to 1,000%, we will be at a point much closer to the short term top and the proportion of optimists will be dominant by far.
Pitfall to Avoid #2: at this point in the cannabis stock market cycle, your conviction toward higher stock prices is probably quite weak. Try to avoid being talked into selling your holdings. The majority of investors and advisors are bearish. If this was not so, cannabis stock prices would be much higher. Over time, the number of optimists will increase so wait for it. Rely on your confidence in the growth of the cannabis industry. Stock prices will look after themselves. Don’t be frightened off by the large increases in cannabis stock prices in a short period of time. Cannabis is a young but rapidly growing industry. The shares that represent the companies in the industry and reflect the high growth rates are more volatile than average. That is why, for example, when the typical “bear” market in major stocks is generally measured as a 20% drop from high to low, I waited for the cannabis indexes to fall double that amount and perhaps they did not bottom out until the index was down 60%. Also, 8 did you know the way the investment community calculates gains and losses results in losses being understated and gains being overstated? For example, if a stock falls 50%, it has to rise 100% for you to break even. For example, if a stock falls from $20 per share to $10 per share, that is a decline of 50%. It has fallen in half. But for you to break even, the stock must rise from $10 per share to $20 per share that is a gain of 100%. It has to double. It take a 100% gain to offset a 50% loss. On Wednesday last week, the MJ Canada Marijuana Index rose 9.8%. Remember, an average year in the major markets is a gain of around 9.8% and the cannabis stocks changed that much in one day!
Pitfall to Avoid #3: At this stage a major potential pitfall is to sell too soon. You cannot benefit from the explosive growth in cannabis in Canada and around the world unless you are invested. Do not be too short sighted. I have listed a couple of the variables that might motivate you to sell. Resist these pressures and hang in there. If you believe, as I do, that the cannabis industry will be significantly larger in a year or two, from current levels the valuations should be larger too. Wait for it.
Conclusion: as the cannabis industry is still in its earliest days, almost everything that happens is for the first time. The chart to the right shows the “long term” picture of marijuana stocks in Canada. Of course, long term in cannabis stock trading means six years compared with over a century of daily prices with the Dow Jones Industrial Average. But the lessons from the major stock markets can be applied to the cannabis stocks. As a result I have tried to identify some pitfalls that would occur if we were talking about the major markets and apply them to the cannabis group. Those pitfalls are: many pundits will be calling for more price declines, that your own emotions toward the cannabis stocks will push you toward selling your cannabis stocks and that I believe selling out at this point would be a serious mistake.