Warren Buffett famously stated that as an investor it is smart to be “fearful when others are greedy and greedy when others are fearful.”
If the most successful investor ever is correct, now is the time to be greedy with cannabis stocks.
The North American cannabis stock index has fallen into a bear market – down 29% on the year.
This extended period of weakness is understandably causing a lot of fear.
Seasoned cannabis investors are worried that the big profits they’ve accumulated in the last two years will wash away.
New investors are worried that they are late to the game and that the bull market has ended.
Those concerns are completely understandable. However, history tells me this is a great time to think and act like Warren Buffet.
This extended period of weakness is the exact same pattern that has unfolded in each of the last two years – and both times those declines led to insane rallies.
Two years ago, from January of 2015 to March of 2016, the North American cannabis index fell 60%. In the next six, months the index jumped more than 300%.
Last year, from January of 2017 to August, the NA cannabis index fell a little more than 30%. Then, in the next six months, the NA cannabis index jumped more than 250%.
Here in 2018, it looks like this exact same pattern is unfolding.
There’s no question this has been a tough stretch for cannabis stocks. These bear markets will test your patience and resolve.
However, these charts tell me that the cannabis sector is much closer to the bottom than the top. And that these periods of weakness usually lead to explosive gains.
I See Two Major Profit Triggers Directly on the Horizon
Canada Goes Legal on October 17: Canada is set to make history on October 17 when it will become the first developed nation in the world to legalize recreational cannabis. This is set to unleash a multi-billion dollar market virtually overnight. Not only will that unleash a multi-billion dollar market virtually overnight, I also expect it to generate a huge amount of interest in cannabis stocks and trigger billions in new capital inflows.
5 US States Voting on Cannabis in Midterms: The US also has big legal news on the horizon. Five US states are set to vote on cannabis programs in the midterm elections in early November. This should provide another jolt to cannabis stocks and also be very good for industry revenue growth.
Beyond Canada and the US, cannabis legalization is sweeping across the entire planet.
According to a new report, the global cannabis market could grow to $63.5 billion by 2024 from $14.3 billion in 2016.
That works out to a 21% compound annual growth rate. That is on par with the technology boom of the late 1990s.
If it happens, and I expect it to, I expect many young cannabis companies to perform incredibly well and deliver big gains to early shareholders.
Between the cyclical chart pattern and the pending sales growth, the cannabis industry is still in its very early stages and this recent bout of weakness should barely look like a blip in the radar in the long trend higher.
How to Proceed
Cannabis stocks are high-risk investments prone to extreme and unpredictable volatility. This type of investment should represent a small portion of an investors portfolio.
It is also a very good idea to be diversified. Don’t put your money into two or three holdings – own 10 to 12 cannabis stocks. If one stock craters, it won’t wreck your entire portfolio.
When the cannabis sector is weak, buy dips and look to add shares.
Focus on the long-term opportunity – that is where the real gains will be made.
Short-term trading is incredibly difficult – and even more so in the highly volatile cannabis sector. Try not to worry about short-term volatility too much.
If you own cannabis stocks and this weakness is causing you stress or making you unhappy – that is a signal that you have too much invested. Use that as an opportunity to trim and rebalance.
The recent history tells me the cannabis sector is on the cusp of a big rally.
Editor, Cannabis Stock Trades
About the Author & Cannabis Stock Trades
Michael Vodicka is a globally syndicated equity analyst with more than 20 years of experience in trading and investing. His research has been featured in some of the industry’s most respected publications.
He has been investing and leading investors in the cannabis sector since 2013.