"Simplicity is the most difficult thing to secure in this world; it is the last limit of experience and the last effort of genius."
George Sand
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In mid 1994, an investment banking Vice President left his “fancy” Wall Street job and started a new company called Cadabra, Inc. While working away in his cubicle at the bank, he’d seen the emergence of what was then called the “Information Superhighway” - now known as the Internet - and he wanted to capitalize on it.
Dot Com Mania
Cadabra was an early ‘dot-com’ company, but as more and more people started accessing the Internet in the mid-1990s, the number of dot-com companies exploded.
Before long, there were countless entrepreneurs raising billions of dollars and taking their dot-com companies public… some by doing as little as adding .com to their company name.
Most of these companies were either losing money and/or had no hope of ever turning a profit.
But so called “investors” didn’t care. The Internet was the next big thing, the stock prices of even the stupidest dot-com companies were soaring to record highs and everyone wanted IN.
Pets or Furniture dot com anyone?
As all bubbles must, this bubble eventually burst. Investors collectively lost more than $5 trillion as the share prices of dot-com companies plummeted. Most dot-coms went out of business altogether.
Cadabra was one of the few dot-com businesses that survived the crash. But by then, of course, it had already changed its name to Amazon.
That’s the nature of just about every major emerging investment trend. It starts in a quiet stealth phase where only a handful of people even know the opportunity exists.
It then slowly builds momentum as savvy investors and fund managers catch on.
It eventually becomes mainstream and turns into a giant feeding frenzy.
Finally, just like investor euphoria sent prices to irrational highs (to the point where there is no next bigger fool left), the bubble ultimately bursts, investors panic, and prices crash to what are often irrational lows.
At the end of the cycle, sanity is finally restored, and a handful of Phoenixes rise from the ashes.
That’s what happened with the dot-com bubble. And we just saw this play out with crypto as well.
Cryptomania
Ten years ago, nobody even knew what a Bitcoin was. Only a handful of very technical people had heard of it. Even fewer understood it.
Many still don’t, but over time, as the price of Bitcoin grew and as more people started learning about it, crypto became “mainstream.”
Retail investors piled in and bid crypto prices up to record highs.
The proverbial cabbies (Uber & Lyft drivers nowadays) started talking about how many coins they had and trades they were going to make.
The term Crypto Millionaire became an actual thing...
$20,000 per coin looked like little more than a speed bump on the way to much higher prices.
The Emperor known as Bitcoin didn’t need any clothes it seemed.
And then… as these things tend to go, the market collapsed by 80%, wiping out countless phony crypto businesses that never had any real chance of success in the first place.
It felt like Bitcoin was going to return to zero.
Yet there are a number of crypto companies that survived the crash-- companies which are presently working on financial technology that could very well radically change the way we do business.
Just like a few internet companies did.
Cannibismania
Right now we’re seeing yet another bubble burst in the cannabis industry.
There’s been a thriving underground market in cannabis for as long as it’s been illegal. But several years ago a nascent industry was born based on an emerging legalization trend in places like Colorado and Canada.
Tons of companies started applying for government-issued licenses to cultivate and sell cannabis, and investors with short memories threw billions of dollars at these businesses.
Many cannabis companies even went public, commanding market valuations as high as $15 billion.
To me there’s a bit of irony when you have large companies that are literally built on… smoke. And as you may have guessed, that bubble too has started to burst; some of the biggest players in the industry have seen their share prices decline by as much as 80% after releasing pitiful financial results.
Sound familiar?
Just like any other bubble, many of these companies are going to get wiped out. They’ve spent the last few years creating hype, rather than working diligently to build a real business. And the cannabis industry undoubtedly comes with additional complications.
It’s important to remember that cannabis is a commodity product; for the most part, there’s very little difference between one company’s cannabis and another company’s cannabis. And no way to really differentiate it, no matter how many flavors are added.
Think of it like flying from New York to LA; consumers just want a base level of service at a “good” price and they don’t really care what the name on the side of the plane is.
Buying cannabis is not like buying Gucci bag where some consumers are willing (stupid enough?) to fork over a LOT more money specifically to own that brand.
Most people just want good quality and a great price, regardless of who grows the product… like those NY to LA plane tickets.
Commodity businesses are highly competitive and tend to result in price wars. It’s great for consumers (mostly), but it squeezes profit margins for the producers.
It’s even worse in the cannabis industry, because there are still plenty of unlicensed (illegal) producers out there who don’t have to jump through the same regulatory hoops, thus their front end cost of production is lower. Ignore for now the whole potential incarceration thing… This means that the illegal producers can offer their products cheaper, taking revenue away from many licensed growers.
But there will be Phoenixes rising from the ashes of this implosion as well.
There have been a number of headlines lately about the ‘death of cannabis.’
Don’t be an idiot…
The Internet didn’t go away after the dot-com bubble burst in 2000. Blockchain Technology didn’t vanish after the crypto crash of 2018.
Cannabis isn’t going away either… certainly now that the legalization movement has taken root.
This is an enormous trend with hundreds of millions of consumers worldwide. And big corporations in a variety of industries-- tobacco, biotech, beverages, consumer products-- want a piece of it.
And it’s not just recreational use.
Non-psychoactive CBD oil has an astonishing number of consumer applications, from anti-aging to physical therapy to cancer treatment.
Once sanity has been restored, some clear winners will emerge… companies with credible, profitable, long-term visions who have been quietly building professional, scalable businesses with low-cost, consistent, high quality production.
The “low cost” part is critical. The key to being profitable in a commodity business is high quality, inexpensive production.
Canada, Colorado, and California are incredibly expensive places to grow cannabis (not to mention the Netherlands and Luxembourg).
So the handful of fully licensed companies who are legally producing high quality product in low cost equatorial regions in Latin America have an enormous advantage.
Most likely the ‘Cadabra/Amazon of Cannabis’ already exists. It’s going to survive this bust, and go on to thrive.
And the enormous potential in the cannabis industry is definitely not going away. It’s just getting started.
How To Make Like A Phoenix
Now the question is “can you pick the winners” in Blockchain and Cannabis right? Can you pick out the next Cadabra from among the sea of Blockchain and Cannabis companies? Can you tell which ones are going to rise Phoenix-like from the ashes?
More simply, how can you benefit from the understanding that busts are just that... but they can be extremely profitable if handled correctly.
Just like during the dot com bubble there are people pounding the table on any number of companies… for a whole host of reasons. Generally, the stories sound reasonable… if not altogether good.
But there are a lot of them… How do you choose?
Traditional fundamentalists would have you believe that you can analyze the companies and their prospects, come up with a valuation based on that analysis and make a decision as to whether to buy a given company or not.
Don’t fall for that.
What they DON’T tell you is how many assumptions and projections are wrapped up in their “analysis.” That their assumption of 40% revenue growth year on year for the next 15 years is not only unreasonable and unlikely to happen, but also the only way to even suggest that some companies will ever become profitable.
In the world of simple trading you let the price behavior of stocks individually and as a group guide your actions. Done correctly (and with due deference to risk), you’ll likely always come out better using price action rather than the crystal ball of fundamental analysis in the end.
And that will let you rise Phoenix-like from your own ashes.
