A Cautionary Tale on Stock Market Deception
Anjali Oberoi | If you’ve been following cannabis news, you’ve noticed that the happy-go-lucky mood of 2018 is now dead and buried. Today, those reporting on the industry are more likely to balance any optimism with a sense of caution and introspection. That’s quite understandable in hindsight of the months-long roller coaster ride that cannabis stock has been on. And it’s not just the fluctuations that is worrying observers:The North American Marijuana Index lost about a third of its value between the first and the last days of 2018.
The North American Cannabis Index in 2018
Many recent pieces deliver detailed insight into why the cannabis party ended so early. As a side note here, and not at all meaning to undermine the relevance of these pieces, to me they are comical reminders that, as Laurence J. Peter put it, “an economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today”.
But our interest at The Workshop is not so much to explain broad economic trends. We aim instead at highlighting their real implications for businesses. Hence, in this particular instance, my main interest is to address cannabis entrepreneurs (and aspiring ones) who are seeing those tepid industry reports roll out every day, and might be wondering if they made bad career choices. Also, more generally, I find that the recent developments in the cannabis industry make for good material to understand how an entrepreneur should account for the stock markets.
Let’s start with remembering a mantra, oft-heard yet seldom explained when stocks go nuts: stock markets are not the economy. There is certainly a correlation between the two: when companies grow and make greater profits, they become more valuable to investors, and in turn their stock prices rise. However, while the act of buying stock is based on observing past trends, it is in reality a bet on the future - people do not buy into a company because it is profitable today, but because they hope it will become more profitable later. In the context of a nascent industry like cannabis, buying stock is even more than a bet... it’s often a gamble. Starting about 2014, the acceleration of recreational cannabis legalization created a rush of questionably-informed investors, sending cannabis stocks soaring. The downward-ish trend of 2018 merely reflects a readjustment of stock prices, based on more reasonable evaluations, as cannabis slowly lost its “next-big-thing” shine.
At the very same time, the cannabis industry actually grew at an annual rate of nearly 16%. We also know that the social normalization of cannabis has progressed at a speedy pace. One sign of that is the doubling of women’s consumption of cannabis between 2017 and 2018. Those are the significant numbers that cannabis entrepreneurs should focus on. They say much more about the prospects of cannabis startups than any news from Wall Street. They are unequivocal signs that the demand for legal cannabis will continue to fuel steady growth and business creation in the industry in the coming few years. More generally, my point is: observing the demand and supply drivers is the more reliable way to project the direction of an industry. Stock markets might distract and mislead you.
All that said, the slowdown of the cannabis stock market does indicate something of importance to cannabis ventures: raising money is about to get harder. The industry is developing and organizing, its infrastructure is taking shape, consumer preferences are starting to settle… and investors are becoming savvier. In a piece I wrote a few months ago, I observed that many commentators (and investors) still looked at cannabis as the next internet, expecting immense and immediate returns. Further, I commented that the organic food industry, where financial return cycles are comparably long, was a much more adequate benchmark for cannabis. Signs are that investors are catching on to that. And, on the scale of difficulty of raising money, doing so in the organic food sector has ranked pretty high for a while. Cannabis entrepreneurs would be wise to take note of that.