Cannabis stocks have been soaring lately, making many investors rich—investors who purchased these stocks when they were trading at a tiny fraction of their current price.
And they will make more investors rich, as they could reach for new highs before eventually crashing down to earth. For a simple reason: The cannabis stock bubble will have to turn into a mania before it bursts.
Every asset bubble is different. It can be easily confused with healthy bull markets. But they all follow a clear pattern. They begin with “investor hype” over a popular theme – an emerging industry or an exotic product that promises to change the world and make many people rich in the process.
Somewhere down the road Wall Street develops the vehicles that ease broad investor participation. Like a mutual fund or an ETF—transforming investor hype into market contagion, as the ‘me too” crowd joins the party.
Easy money by central banks adds excitement to the party. It provides “the air” – financing for the bubble to grow bigger and bigger. Optimistic predictions by market gurus and growing controversy in the mass and social media magnify and spin the buzz. Prices double or even quadruple in a matter of days, even hours—turning market contagion into mania. Investing in this theme reaches a cascade. No investor wants to be left behind.
Finally, the bubble bursts in the usual way: early investors have already cashed out, and there are no more investors to join the party.
Apparently, the ongoing run up in Cannabis stocks has most of the elements of a bubble.
There’s investor hype around the legalization of medical marijuana driven by a number of factors. One of them is estimates by firms like Euromonitor, which predict that the American market for legal marijuana products will reach $20 billion by 2020, four times its 2015 size.
Another is the upcoming midterm elections, which could benefit legal marijuana no matter what the outcome is.
And there is a growing number of alcohol companies investing in legal marijuana.
Meanwhile, scores of investors are becoming familiar with Cannabis stocks, and can use investment trusts like MJ to conveniently participate in the market.
Adding to the hype is an ultra-low interest rate environment (which has lowered the cost of holding inflated stocks).
But there’s one thing still missing to turn the bubble into mania: a broad participation beyond the “pioneers” and the “early adopters,” to “early majority–” along the Rogers curve.
That’s when the demand for Cannabis stocks will reach a cascade and turn into mania. The point where a critical mass of investors hurry to buy “hot” Cannabis stocks for the promise they hold — rather than for the fundamentals they display.
Cannabis stock leader Tilray, Inc., for instance, has negative profit margins, but its stock is trading in triple digits.
Wall Street’s old-timers know all too well what happens when money becomes tight and investment promises aren’t fulfilled. Bubbles and manias end; and millions made are lost much faster than they were made.
And then some.
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