Cambria Investment Management co-founder and Chief Investment Officer Meb Faber published a recent blog where he began by asking a simple question: Would you like to go back in time and invest in beer companies when the United States ended Prohibition in 1933?
For the vast majority of people who answered “heck yeah” or some affirmative variation to that question, he explained in detail why now is the time to get into cannabis stocks because prohibition — on the all-important federal level — is soon coming to an end.
And like the beer company stocks that returned 20% profits for the entire decade following the end of prohibition, the same is going for cannabis once it is legalized.
“The reality is that the investment opportunity in front of us is a rarity,” Faber said in a recent blog post. “It’s an exciting time to be an investor considering the cannabis sector. The stocks returned 20% per year in the decade following legalization, nearly double the returns of the overall market.
“It almost feels as though we’re witnessing a massive dam being removed, making way for the flood that’s been long pent up.”
The blog is packed full of useful information for any potential investor and rather lengthy in its entirety, so we’ll stick to the investment tips portion.
As is always the case before making any investments, you are the steward of your own affairs and must do your own due diligence to get the full picture of what is happening in the cannabis sector, which can be highly volatile. If you’re prepared and willing to buy into the volatility then, as Warren Buffet says, buy-and-hold is your best strategy.
Please read the post in its entirety by clicking here.
How best to break in
If U.S. equities are, like we believe, trading at lofty valuations … and if we can draw somewhat accurate predictions about future returns based on starting valuations, which we think we can … then your average, bread-and-butter U.S. equity is going to underwhelm over the next decade. We’ve stated a balanced U.S. stocks and bonds portfolio is likely to return about 3-4% per annum over the next decade.
We’ve detailed many times over the past few years ideas to improve this situation, namely a global value approach to equities where valuations are much more reasonable, coupled with a global trend following approach to capitalize on momentum and trend where it arises.
We would also consider exploring a thematic industry poised to grow at nearly 30% a year. As far as position sizing, it should be a tiny portion of your overall allocation. My approach, which is similar in concept to the above ideas on mean reversion, would be to purchase a starter position, then also consider adding an additional “unit” if the stocks in the industry declined 60%, and another unit at 80%. And in all cases estimate a 10-year+ holding period (most of the post-Prohibition outperformance of the beer sector came at the end of the decade). After all, many of these companies are pre-earnings, and some even pre-revenue!
It’s for these reasons we see cannabis as a potentially-lucrative addition to a portfolio … when approached responsibly.
Full disclosure: The author of this piece holds New York-exchange traded stocks in Canopy Growth, Aurora Cannabis and Neptune Wellness.