Watching the Waves of Cannabis Investing
- by Morgan Paxhia
“History doesn’t repeat itself, but it often rhymes” - Mark Twain
Rhyme #1 — Dotcom and Cannabis Bubbles
We sure seem to be saying and hearing this Mark Twain quote a lot in 2021, as we watch the cannabis public markets cycle lower for 7 straight months. So where is the rhyme? Our team has been tracking the Global Cannabis Stock Index (GCSI) since its inception. We follow it for Poseidon’s internal purposes, but also to contemplate it in a broader context of historical market movements. Years ago, we developed the Poseidon Cannabis Alpha Wave to depict a cycle we saw playing out, which is still relevant today, following a hype cycle in our emerging industry. Poseidon also looked to other early-stage markets that experienced bubble rises and bursts regarding public stock prices. We see a lot of rhyming with the great Dotcom Bubble that burst in the early 2000s. This parallel is very relevant to us, as there was a lot of hype and not much substance in that bubble. Certainly, we saw the seeds of long-term winners, such as Amazon, Apple, Netflix, etc. but there was also an abundance ofnoise, fraud, and ultimately ZEROS in that wave.
Cannabis has witnessed a very similar cycle, with the last bubble topping out in February 2018, led by the Canadian LPs, who continue to struggle today from a fundamental and stock price perspective. We have observed an interesting pattern over these past 7 years and since the inception of the GCSI, cannabis stock prices peak every year between January/February and April. Stock prices for many cannabis names seem to be in a more aggressive down spike in September 2021, as it seems that people are finally reaching their point of mental / emotional despair/pessimism. Here is a look at the Nasdaq and the GCSI, matching their bubble tops (Nasdaq start date of 02/01/00 and GCSI start date of 02/01/18) and then tracking their performance each month with September 10, 2021 closing price plugged in for the GCSI:
These two are clearly not repeating but directionally seems quite similar. One could suspect these two would track closer if there were a more similar percentage ownership of institutional capital. We will only know in hindsight.
Rhyme #2: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” — Sir John Templeton
We see growing frustration from investors on social media, as they are more vocally expressing their pain from a market that has declined over 50% from its February 2021 peak. These times are never enjoyable, as the market will make any person question their thesis, their process, and test their ability to stick to the path or to bail out.
The chart above looks very familiar with the sentiment we are seeing on twitter daily.
As the chart of risk to opportunity shows, the capitulation phase is not the bottom, but nearing that point. We do not know what the future holds but we are purely observing sentiment that is very visible on social media. Another indicator is when people begin bragging about how much money they are making and how easy it is to bet against, or short stocks, which is just the inverse of this chart. Take note how people brag and say how easy it is to make money when we are in the Thrill phase going to Euphoria. Cycles repeat as the market is comprised of people expressing their behaviors and willingness to pay/participate. The questions are how long is the duration of the cycle and is it a large cycle or a cycle contained within a cycle? We believe we are in a secular growth industry and these intra-year cycles are a part of that larger cycle. We will see over time and we will see how much further sentiment can decline before the clouds begin to part. Given the underlying fundamentals and valuations, one could suspect a change is becoming very clear on the horizon.
Who knows, someday those of us who leaned in during these low points might be considered ‘lucky’ when cannabis is no longer siloed and confined to the OTC markets and the stock prices look a lot different. But we will all know that it was our conviction and hard work that got us there as we took advantage of the opportunities available.
“Obviously, there is an inequality of opportunities among people. But there is also an inequality of readiness, some people are more ready to make use of the opportunities that come up than others” — Brian Eno
We look forward to seeing more of the active and cannabis investors this fall at industry events such as MJUnpacked & MJ Biz Con in October. Be well, stay safe and keep a weather eye out for the turns.