As cryptocurrencies and their companies continue to plunge–the sector’s down 68% since January 1, 2018–stories abound of individual would-be-investors gamblers that have been wiped out. Again. It doesn’t have to be this way.
There’s nothing new here, just all the usual suspects: a hot idea heavily sold to the gullible, who bet money they can’t afford to lose on the hope, against all odds, that they might win.
As one bubble crashes others are always being born, and most recently it’s in the area of marijuana. Pot-related companies are buying up the booths and sponsorship on financial media and investment conferences the way that crypto-cos did last year, and commodity companies in 2008. Everywhere we turn, people are selling others on the dream of striking gold in pot.
There’s no doubt that legalized pot is an idea whose time has come to North America and there will be companies who profit greatly. That said, statistics warn that some 80% of current start-ups will have vanished within 5 years, and the vast majority of shareholders in this space will lose money.
Like dot.com stocks in 2000, precious metals and the China bubble in 2007, pot is just the next speculative mania waiting to pummel the unsuspecting.
To survive the madness of crowds, we must never forget that great products and ideas are frequently bad investments. And risk rules that control any exposure amount and timing are the most defining criteria of our longer-term financial success or failure.
We discussed these concepts in our November 2017 client letter (available here) written 2 months before the crypto-bubble burst, and they are directly applicable to pot stocks today:
“…great ideas or products frequently prove devastating investments depending on the price paid and timing. It is one thing for IBM, Credit Suisse or governments to allocate portions of their Research & Development budgets to develop blockchain and improve their operating efficiency. It is something else entirely for individuals to bet their savings that shares of one or another developer, service provider, or alt-coin, may go up in value before they need or want to sell it.
With no income flow or asset backing of any kind, cryptocurrencies can’t be valued as an investment and are the very definition of speculation. If one is interested in speculation, then like when heading to a casino, it is critical to limit our wager to a defined amount we feel comfortable losing, without any negative effect on lifestyle, future goals or peace of mind.
As usual, the loudest proponents of a financial product or investment theme are typically those in the business of selling it to others (in exchange for our cash). As in all things, if we are taking our buy advice from those who are paid to sell us the products, we are putting ourselves and capital in harm’s way.”
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