Investors can jump with enthusiasm to the hottest new product or the latest revolutionary service offering. Often the leap of faith makes very little financial sense. Nevertheless, these high-flying valuations can continue for a surprisingly long period.
There appears to be no method to gauge "peak" investor interest. We could ride the trend and exit with handsome profits if we had such a tool. Many years ago I searched for such a tool.....
Commodity traders try to read tea leaves with modest success. I worked in the mid 1980's at Prudential Bache, a major U.S. investment firm. Encouraged to trade commodities, I received my license and set up my first trade. Pru-Bache opined that Pork Bellies was an attractive buy, so I invested $2,000, which produced a $2,000 profit. I was on a roll. Next up the analyst recommended buying Pork Belly futures for one month and selling a more distant month (a spread trade). I took his advice and invested my $4,000 bankroll. The trade had considerable leverage and I called the analyst to make sure I understood the risk profile. He confirmed that the risk was limited, but in exceptional circumstances, this spread trade could expose me to considerable risk. What! Time to stop trading commodities. I closed the trade with a profit and never traded commodities again.
In a more recent time frame, it never occurred to me to trade or invest in watches Glad I missed that opportunity.........
But what if you knew that the legalization of a product would attract a frenzy of buying? You could buy in before the masses and wait to count your winnings. Two products could be legalized in the U.S. in the next year or two and there is already considerable "buzz".
Legalize Cannabis
Cannabis was legalized in Canada on October 17, 2018. The federal government anticipated substantial tax revenue (they were correct) and decriminalization of a soft drug market, so as not to clog up Canadian courts.
The leading Cannabis producer, Canopy Growth was a supernova stock before legalization. Over time they acquired a major shareholder Constellation Brands (very successful in the liquor business, now down several billion dollars on their Canopy investment). The future looked rosy, but it was time to sell for existing shareholders.
This was not a case of one company doing poorly, the whole industry was devastated. The economics of Cannabis production and distribution made no economic sense. The black market still exists, is non-taxable, non-regulated and will always undercut government pricing.
Performance of a portfolio of Cannabis stocks
Annualized Performance (%) *
**Fund performance, as at December 31, 2023
How might the Canadian experience with Bitcoin ETFs, inform global investors?
There is strong speculation that the U.S. Security Exchange Commission will imminently approve the distribution of ETFs that invest directly in Bitcoin. This excitement could be part of the reason for the recent strength in crypto pricing. The question, for those interested in Bitcoin, is the potential for approval already baked into Bitcoin pricing?
The Canadian experience of investing in Bitcoin-based ETFs is not for the faint of heart. Canadian regulators approved a Bitcoin ETF structure in early 2021 (one example being the Purpose Bitcoin ETF). Investors have experienced unsettling volatility.
Annual Performance Purpose Bitcoin ETF
2021 -6.27%...a modest loss
2022 -65.27%... a devastating loss, recovery of capital in question
2023 +145.93%... Terrific, but the prior two years leave investors down 18.48%
As with all investments, the future path of return is unknown. Conservative investments lack entertainment value and have less upside potential (the tradeoff is that conservative investments have far less risk of substantial capital loss).
In the long run, the economic viability of the underlying asset is what truly matters.
Best wishes for investment success in 2024
regards, Tim
Tim Morton, CFA is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com and a contributor to Barron's. My comments are not to be taken as investment recommendations. They are purely for discussion purposes. Please see your registered advisor for investment advice.