At the best of times investing is challenging. It requires discipline, patience, attention to detail, and an emotional detachment from the investment itself. Often, when in rooms of investors and entrepreneurs, we find the exact opposite; conversations that are excited, decisions that are emotional, partnerships founded on hope to cash in on the next “gold rush.”
It has become so common that we all are familiar with the cliche “the Green Rush.” Even the term is contrary to solid disciplined investing practices. “Rushing” is often equated with losing in many investing and trading circles where the more solid axiom “slow is smooth, smooth is fast.” The legal cannabis industry seems to be bringing out enthusiasm and fear like no other industry in memory. Why?
Emotions are generally considered a detriment in investing because they can sway a rational investor into making ill-advised decisions based on fear, overconfidence or some other bias. So how can we become self-aware of our psychological state as it pertains to investment decisions in Cannabis? The key is in understanding our perceptions and how they sometimes stem from deep-rooted personal, and societal, bias.
Beware 'Confirmation Bias'
Have you ever bought a “lemon” for a car based on a personal fantasy? Congratulations, you just experienced “Confirmation Bias,” where you gathered information based on a preconceived notions to the extent that you ignored, refuted or discredited information that conflicted with your base perceptions. In the case of legal cannabis, many investors are overconfident and allow hope and optimism to effect their vision of returns based purely on the massive demand they know already exists for marijuana.
For some outside perspective, I spoke with Derek Petersen, CEO of Terra Tech Corp, a publicly traded cannabis company about the dangers of overconfidence when investing in legal cannabis.
“There’s a misconception in cannabis that everyone is going to be a millionaire overnight and that’s just not the case. There is an education gap for investors that don’t understand the risk profile – they need a little more handholding but there aren’t really brokers for this – and even if they have a broker, the brokers don’t understand. There aren’t any analysts covering this industry.”
To the degree that brokers and analysts do the hand-holding, they also serve as emotional protectors and promoters, making it that much more essential for people to be introspective.
I also reached out to Robert Fireman of Marimed Advisors for his take on the issue. He brought up the fact that the first slew of fly-by-night marijuana companies listed on the OTC market played on the overconfidence investors had regarding cannabis.
“The problem is that the initial realm of public companies in the cannabis industry, played the hype of the stock, and made projections that made no sense in reality. So the marketplace was tainted and when people peeled back the onion, there was no substance, revenue, business plans… just people saying they’d do things.”
Unfortunately for early cannabis investors, their passion for the end of marijuana prohibition may have played into their decision to overlook a lack of documented revenue or basic corporate documents which business owners in other industries would be hard-pressed to ignore (largely because most legal industries are so heavily regulated).
Yet research indicates that the effect of Confirmation Bias is stronger for emotionally charged issues and deeply entrenched beliefs. Viewed from the other end of the spectrum, the propaganda surrounding the plant has created a societal stigma that has influenced the opinions of millions of Americans.
Social stigma still affects people's willingness to invest
Paranoia and moral judgment have been perpetuated through political agendas and mainstream media for decades. Elizabeth Nichols, Managing Partner of The Rosebud Group, told me that she talks to friends of hers who live in Oklahoma and Texas, and that “there is a fear of investing [in cannabis] still."
"They’d love to invest, but they don’t want their name attached," says Nichols. "They’re afraid someday the federal government could decide everyone who has ever invested is going to jail. There was a Texas state legislator who was going to run for office for the House and the news article came out that he invested in a cannabis-related business having something to do with hydroponics – not directly touching the plant, and they made such a stink that he dropped out. It’s a big scary deal for people.”
In that light, it‘s easy to see how the stigma associated with cannabis could skew one’s judgment of how to rationally approach an investment opportunity. Fireman’s opinion about how those types of fears tend to play into investors’ minds goes like this: “The challenges of cannabis in the public arena are more difficult than other businesses because people shy away. The private investors that want to be in this business are not totally enamored by being in a public company that’s not supported by investment banking, and subject to the whim of the penny stock traders that can play it up and down for their own win.”
Petersen expressed a similar opinion on the stigma issue.
“Everything we do, we act like an exchange company. In the penny stock world you have more latitude. There are stigmas attached to this – so first and foremost we uplist to the highest level we have the ability to get to. We brought on outside board members, formed compensation committees and audit committees which are things NASDAQ would look for. There’s a lot of transparency in a company like ours, and we’re under similar scrutiny that you would find in a NASDAQ listed company.”
How can you overcome an emotional predisposition in legal cannabis investing? First, take an honest view of your position. Are you more fueled by the possibility of the win, based on a personal affinity for the cannabis plant and what this change represents or are you thinking more about the uncertainty regarding banking, federal prohibition, Internal Revenue Code 280E, and the patchwork of regulations that are different from state to state and the fear associated with those challenges paralyzes you even if the biggest opportunities will be gone?
Learn to rationally assess the risks
Take a step back. Take a look at where you are historically and the types of risks you’ve felt comfortable taking in the past. I doubt the upside was as extreme as we are seeing with legal cannabis. The fear factor may be greater here, but do the economics actually match the tenor of your fear? Is the risk you perceive rational or is your aversion to investing in cannabis based on perceptions that belie decades of propaganda? You are the only one that can read your own mind, but remember the role that Confirmation Bias plays in your decision making.
Once mentally grounded, you can ascertain your true risk tolerance and comfort level in regards to entering the legal cannabis space. For investors that have issues with ambiguity, publicly traded companies offer public information, quarterly updates and allow the investor to easily sell their position and exit because of the liquidity in the market (assuming the company actually trades enough - there are many that “trade by appointment”).
And, for those of you who are traders or have a tendency to be impatient and want the liquidity to easily exit, then investing in the public markets may be your best bet. When reviewing private companies for investment, the calculations are very different. There is no mandated transparency. There is no likelihood of liquidity any time in the near future. In general, private investments require an even higher threshold of due diligence, and commitment to the investment overall.
This opportunity in time presents something we have never seen before - a massive industry being formed that has enormous social good associated with it. It is critical to enjoy that convergence while staying disciplined and focused. The temptation to let your emotions get the better of you will never be greater, and if you stay true to your strategy and method, the opportunity to thrill with the win will never be equaled in many lifetimes.
This is the second in a series of monthly columns by Leslie Bocskor about financial issues in the cannabis industry. The first, How Banks Are Keeping The Black Market Alive In The Cannabis Industry, was published in September.
Leslie Bocskor with his advisory firm Electrum Partners is leading the evolving discussion around policy, entrepreneurship, and investment in the cannabis industry, nationally and internationally. As founding chairman of the Nevada Cannabis Industry Association, and with his far-reaching Wall Street background, he’s helping design the models for cannabis industry investment, business and regulation, as Nevada did with gaming. Whether it's big pharma’s long tail or first-mover investors taking advantage of early opportunity, Bocskor's insights and influence have made him a trusted expert and revered pundit on getting in and getting out of cannabis investments successfully.