By Lawrence W. Horwitz
At the risk of dating myself, one of my favorite Broadway plays is “South Pacific” and “Bali Hai” is a song in the show. Bali Hai is an island out in the distance upon which many wonderful things can and actually do occur in the show. But of course it is discovered to be a fantasy and the reality of World War II eventually encroaches upon the story.
Investing in cannabis public companies is like traveling to Bali Hai. We can all see it in the distance and no doubt there are potentially some wonderful things there, but with the exception of the late-2013 to early-2014 bubble, from which fortunes were made, there has been little sustained progress in producing a truly public company sector Version 2.0.
No doubt companies like Massroots (OTCQB: MSRT) have set the bar higher for all future public plays in legal cannabis, but it is a specific technology and certainly there is no fundamental valuation technique justifying the $70M+ present market capitalization. So what’s an investor to do?
Three things are likely to happen in 2016:
- California recreational legalization expanding the market and the public company opportunities;
- Increasing pressure on the federal government to provide certainty on banking, distribution and the entire industry; and
- A stock market that increasingly will be inundated with V 2.0 public cannabis companies.
So how does an enterprising investor take advantage of the convergence of the above trends? As with most stock plays the key is diversification and the present composition of the cannabis market—see the Marijuana Index— simply does not support a broad basket of reporting cannabis companies with effective business plans and properly managed markets for their stock. I know of an investor who has invested a few hundred dollars in perhaps 50-60 cannabis companies and thus far his returns have been … well, let’s say less than stellar.
So how do we build a diversified portfolio of legal cannabis stocks that we think will outperform not just the general stock market, but also the broad composite index charted on the Marijuana Index? The answer is selectively, slowly and by allowing the portfolio to build over time.
There are various structures such as exchange-traded funds, mutual funds, private equity groups and the list goes on, but the bottom line is presently there are not sufficient V 2.0 true cannabis industry public companies to support a profitable diversified portfolio.
Timing is everything and that is where we are through our MJIC Capital Inc. subsidiary with this issue. As Bob Dylan said, “for the times they are a-changin’” and we are fully prepared to bet that this applies to the opportunity to launch the first true cannabis industry mutual fund. We believe that by late 2016 through early 2017, after the election and California’s expected legalization, there will be sufficient inventory of interesting V 2.0 cannabis industry public companies, some of which we have invested in and/or are supporting operations as they position their public offering, to launch a diversified mutual fund. And with everyday investors continuing to look for ways to enter the green rush, a diversified marijuana mutual fund could be their ticket.