Surviving the Crowded Swimming Pool

Responding to a love note... Remember why we're here... Surviving the crowded swimming pool... Legalization is coming for cannabis... A simple two-step plan for success in a speculative market...

Editor's note: Today, we're sharing a special guest essay from Stansberry Research editor Thomas Carroll, adapted from an update he recently sent to his Cannabis Capitalist subscribers about the risks and rewards of a volatile market...

No question... 2022 has been excruciating...

War is raging in Ukraine... inflation is higher than it has been in generations... interest rates are climbing... and the political climate continues to be hostile...

It's downright depressing... and investors need look no further than their brokerage accounts to see the fallout of all this crisis and chaos. The U.S. benchmark S&P 500 Index is down nearly 24% since the start of the year.

I (Thomas Carroll) won't sugarcoat it...

The decline in the stock market has been brutal for speculative investments, including marijuana stocks like the ones in the Cannabis Capitalist model portfolio...

And as the feedback e-mails from my subscribers make clear, plenty of them noticed. Here's a little love note I received from subscriber Mark N...

Your latest column just makes me laugh. Your portfolio is a disaster – personally, it's the worst performing, by far, of any of my Stansberry investments. Today you recommend to get "greedy." That's easy to do if you have not already invested and taken a big hit on this decision. But given what I know now, I would not invest another dollar on your advice. I guess I would have liked to see more admission of error over the past years. My only consolation is that I sold all my portfolio months ago and don't have to worry about this sector anymore.

To be sure, the stocks in the Cannabis Capitalist model portfolio have been cut nearly in half so far in 2022, down roughly 49% as of the latest monthly issue. That's tough to swallow...

But a year ago, those stocks were showing a triple-digit gain. So what happened? And what should we expect in this growing industry next?

Let's remember why we're here...

Given the volatility in the stock market – and the Cannabis Capitalist model portfolio – I want to emphasize the importance of staying in the cannabis market.

Here's the foundation of the newsletter's investment thesis...

Cannabis is poised to become the biggest new market in a generation – and the most volatile.

Smart people from various other industries have left lucrative jobs to get involved. This includes hedge-fund managers, private-equity investors, pharmaceutical executives, consumer-goods experts, celebrities, and even former members of Congress.

I became involved in 2014 with the biggest investment I've ever made in a private company. So trust me... I'm feeling this downturn as well.

Cannabis is not a "pre-revenue investment" or a sector that "might" happen. The boom IS happening. But...

We knew it would be rocky...

When Stansberry Research launched the Cannabis Capitalist newsletter in March 2019, the fledgling sector had already seen massive volatility with three spikes and crashes from 2017 to 2019.

Cannabis stocks flourished for the first half of 2019... only to turn south and bottom in 2020 with the pandemic market meltdown. The sector then rallied into what we called the "cannabis election trade."

In April 2021, we had 10 winners out of 13 open positions. The average gain was 128%.

The North American Marijuana ("NAMMAR") Index – which tracks the performance of all cannabis stocks that trade publicly in the U.S. and Canada – was off 27%.

Cannabis Capitalist continued to recommend the best businesses in the industry. But as you can see in the following chart, investor enthusiasm for cannabis stocks has evaporated over the past year or so...

Today, the average return for all Cannabis Capitalist recommendations since its launch is -3.7%. Over the same period, comparable investments in the NAMMAR Index would have returned -34%.

So the strategy of finding the highest-quality companies has clearly uncovered stocks that are holding up better. But I get the sentiment of folks like Mark N. and other subscribers: That's cold comfort when we're looking at so many negative returns today.

The volatility reflects one key fact about the cannabis sector...

The market is abnormal...

You see, this sector is dominated by individual investors. Institutional investors are still mostly locked out, given the lack of regulatory approval in the industry thus far.

Retail investors hold 96% of shares of cannabis stocks, while institutional holdings account for just 4%...

And here's the thing... Individual investors tend to be more emotional than institutional investors. They typically overreact in good times and bad. And they move in herds.

Imagine 50 people jumping into a backyard swimming pool all at once. The water would splash like crazy and overflow the patio. But if those same 50 people were jumping into the ocean, they'd have virtually no effect.

The cannabis market is a swimming pool right now. It's subject to the whims of a small number of swimmers. I can tell you the stocks in the Cannabis Capitalist portfolio are 10 times more financially sound than they were a year ago... but their share prices are down 80%.

You might say, "That makes no sense." Well, markets don't make sense a lot of times... especially young markets.

But as the industry matures, I sense this type of wild volatility will ease. As this changes – and it will – valuations will expand, and these shares will skyrocket.

What looks like a massive hit right now is actually an incredible opportunity...

The short-term booms and busts of the industry can disguise this fact. But as I keep telling subscribers...

The future of all cannabis stocks is happening now.

The industry achieved another major milestone last month, when Bright Green (BGXX) went public on the Nasdaq.

Bright Green won approval from the U.S. Drug Enforcement Administration to grow and sell cannabis for research. This is a big deal. Remember, cannabis is still illegal in the U.S. at the federal level. Even so... the stock was allowed to trade on the Nasdaq.

The stock rocketed up out of the gate, doubling on its initial public offering ("IPO") and defying the overall market slump... at least for a while. Now it trades for less than $3 per share, down nearly 95% from last month's peak.

But I'm bringing up the company because of the point it makes...

It gives us one more example of a federal agency making a decision that flies in the face of federal illegality. The writing is clearly on the wall. Nothing is going to reverse the steady march toward legality.

By that, I mean federal legalization...

In the past decade, we've already seen 19 states, plus Washington, D.C., legalize cannabis use for adults. Even more – 37 states and D.C. – have approved cannabis for medical use.

In November, a new slate of states (Hawaii, Maryland, and Minnesota, to name a few) are expected to legalize cannabis for adult use.

The next big step is federal approval... As I wrote in the June issue of Cannabis Capitalist, the issue is expected to come up in the Senate by next month.

Before the August recess, I expect the Senate legalization bill from Senate Majority Leader Chuck Schumer (the Cannabis Administration & Opportunity Act). The bill was delayed from April, and now the heat is on for Congress to make a move.

In short, the Cannabis Administration & Opportunity Act would end the ban of cannabis at the federal level.

In addition, there is currently a lot of movement in Congress to pass the SAFE Banking Act this year. This would make it easier for cannabis companies to do business through the banking system and other financial markets (like listings on U.S. stock exchanges).

A two-step plan for success in a speculative market...

So how can you approach a market that is poised for immense growth while also protecting yourself against the inevitable drawdowns when investors get spooked?

That's where the Cannabis Capitalist strategy matters...

1. Start low and go slow.

This is the mantra of every medical budtender to patients who receive medical marijuana. If you are looking for better sleep or pain relief, they recommend starting with a low dose and working up from there.

Investors should approach cannabis the same way... Speculative, volatile stocks should account for only a small percentage of your portfolio.

Famed Fidelity portfolio manager Peter Lynch had six types of stocks to buy. His favorite was called "Fast Growers." The largest returns he made came from owning these stocks. But this group also contained more risk...

Cannabis stocks fall into this category, so they should make up a small part of your portfolio. For example, if you have 20 years of investing ahead of you and allocate 30% of your portfolio to growth stocks, less than 5% should be cannabis.

The numbers are different for every investor. Be honest with yourself and only include speculative stocks if they are suitable for your financial situation.

2. Stick it out and buy more if you can.

We know this sector is going to keep growing.

Since we launched Cannabis Capitalist, our approach has been to find the best companies, buy their stocks, and keep them until legalization.

When it becomes apparent that legalization is upon us, this group of stocks is going to soar. That frenzy is when we will take profits and rethink the cannabis market.

We've seen a preview of this already in February 2021. When Joe Biden won the presidency and the Democrats took the two Georgia Senate seats to gain control of Congress, it set up a best-case scenario for cannabis.

I expected bipartisan legalization efforts to gain real traction and push the sector even higher.

This did not happen... A draft bill of the Cannabis Administration and Opportunity Act was introduced in July 2021, but a vote still hasn't happened. In February, Schumer asked other senators to "join the process of perfecting" the draft and later delayed further talks until this summer.

3. Take profits in good times.

In retrospect, I should have recommended taking more profits in the broad market downturn, like I did with GrowGeneration (GRWG) – a company I describe as the "Home Depot of cannabis." I'll be watching for more opportunities to help Cannabis Capitalist subscribers cash out.

As a mentor once told me, "Never feel bad about taking some money to the bank."

But at this point, stand pat...

There's no point locking in losses when a turnaround is all but inevitable. Again, in Cannabis Capitalist, we want to own the best names in the sector and hold them through the volatility.

A friend of mine – Aaron Edelheit, founder of Mindset Value – adopted the same mantra for the cannabis-focused hedge fund he launched in November 2021. He said he'd buy the best companies and ignore the volatility until the stocks were much, much higher. It's great to see a smart cannabis investor sharing my philosophy.

The guiding principle here at Stansberry Research is that we offer research and opinions we would want ourselves if our roles were reversed. We do the work, make the best calls we can, and offer those opinions to our subscribers.

Hopefully the stocks do what makes sense. As I mentioned, sometimes the market does all it can to make us look foolish. But over a 20-year investing career, I've seen over and over that when investors have a well-thought-out process and stick to it... the results will follow.

That's what will happen here again. Eventually our strategy of buying the strongest cannabis stocks and hanging on for the long run will pay off when legalization sweeps the federal level.

The Stansberry Conference Is Back

Want to hear more of what Thomas and the rest of the Stansberry Research editors and analysts have to say – in person?

There's no better place than our annual Stansberry Research conference, which we're hosting this year on October 24 and 25 at the luxurious Encore Harbor resort in Boston, Massachusetts...

In addition to hearing from a lineup of your favorite editors, including Dr. Steve Sjuggerud, Dr. David "Doc" Eifrig, Dan Ferris, and Eric Wade, you'll have the chance to hear exclusive stock recommendations and market insight from a host of special guests... including Scott Galloway, the popular professor of marketing at New York University's Stern School of Business.

Tickets are already selling fast, so make sure to reserve your spot today... Click here for more details and to see our entire speaker lineup. If you act now, early tickets also come with a $1,000 free gift – for a limited time only.

52-week highs (as of 6/21/22): None.

In today's mailbag, feedback on Kim Iskyan's Tuesday Digest... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I am a subscriber and generally content reader of most of your articles – regardless of my concurrence with the content. The most recent one – identified above – is the exception. Political commentary, that maintains the hubris of certainty on this level, should be left out of an otherwise wonderful publication.

"Ukraine – for all the good people that live there – has many insidious issues that those who understand geo political affairs are well acquainted with. It also is an axis point of vast importance, from resources to demographic significance. That it has been so for centuries should pose no surprise to any of historical knowledge of what is occurring now and how Russia's leaders are responding. To compare Putin to Hitler or Stalin is absurd. He is revered and loved by millions of his citizens – especially the millions living in Ukraine. He is also despised by others not unlike western democracies.

"There are so many reasonable arguments for what Putin is doing that I will not get into them, but for one. The Western Allies have broken their agreement with the former Soviet Union on the expansion of NATO – about a dozen times now. I wonder how the U.S. would respond if China established missile bases in Mexico?

"The 'atrocities' that we hear about are only relevant due to the attention that they get. If we look to Yemen, Syria, Libya, Iraq, Afghanistan, Vietnam, Korea, etc. ad infinitum, we see empire builders operating in the very same way. This is NOT to include the numerous ongoing genocides currently underway with our Asian trading partner.

"I will, however, leave all judgement for the creator and focus on how I may operate morally and ethically. To represent this in the decisions I make while trying to ensure sound economic choices that benefit myself and those I care about is my focus. In doing so, hopefully I will be left out of the fallout from those that choose to decide where borders are drawn and how the world's resources are governed and who are its victims." – Paid-up subscriber Andrew J.

"[This] analysis misses Russia's success with destroying Ukraine. Turn the chess board around. The European, specifically German, energy grid is in dire straits. They are retooling to coal. China is a huge beneficiary as they are now importing more oil from Russia than Saudi Arabia, and commerce with Russia is up 35%. Note the Ruble. Way up.

"The U.S. foolishly won't open our energy resources thus slamming the U.S. economy. Putin is laughing all the way to the bank." – Paid-up subscriber Hoyt C.

"Hi Kim, I enjoyed your article. Reminded that Russia has an enormous nuclear arsenal, one has to be very aware that there could come a time, a very dangerous time, when Putin, backed into a corner, decides to say 'f*** it' and starts holding that nuclear Sword of Damocles over the West's head...

"What would we do? Do we DARE try a game of brinksmanship with someone who is so on the verge of total defeat that he will literally 'scorch the earth' rather than back down. It seems like a real possibility, and it makes me very uncomfortable that the West seems to continue pushing the escalation story (more aid, more weapons, more membership in alliances) rather than trying to ease tensions and cool heads.

"Ukraine asked to be invaded by its foolish and very naive insistence in pursuing closer ties with the West, rather than taking a hint and remaining nicely neutral. This is scary... We're not talking Syria here. Armageddon? Maybe." – Paid-up subscriber Jorge G.

Regards,

Thomas Carroll
Baltimore, Maryland
June 22, 2022