Capitalism, the Exceptional and Unique

 
 

Exceptional and unique stand out from the crowd. This applies to people, places, and things. Most of us would like to meet, experience, and have exceptional or unique people, places, and things in our lives. The spice of life has a lot to do with these two characteristics. They are also what can make any of these items more expensive. 

The downside of these qualities is that they rarely remain sought after for the long-term. Once something is identified as a new opportunity, the pirates of capitalism raise anchor and set their course to plunder. We all know about copyright and patent laws. But we also know these laws are marginally effective in preventing knock-offs and similar products from evolving and taking market share. 

So goes the law of supply and demand. Capitalism fills a void where there is opportunity. As an investor, you need to be wary and observant. You can count on many other businesses or organizations chasing the same opportunity. You need to know who the competition is, and are they catching up?

I love searching for something that is unique and exceptional that the world actually needs. And if you can find something that is years ahead of the competition, you may be able to relax for a little while. Success almost guarantees competition. Today, the speed of technology can make catching up potentially much faster than in the past. Technology can even make raising money much easier. The number of crowd funding sites and their success is evidence of this.

For Example

Cannabis related stocks are an example. These companies include growers, distributers, product manufacturers and a host of related companies. We looked at this budding industry in 2016. We were looking at it before the hype of the 2016 US election where multiple large states were holding referendums to legalize it for recreational use. But comments and policy from The Canadian Federal Government had already lit the fires of opportunity in Canada, and the referendums in the US were the icing on the speculation cake.

Our study of this sector showed that the prices of virtually all of the stocks were grossly overvalued. Prices rose to the pointwhere it would take years of exceptional growth to remotely justify the valuations.  But logic does not deter investors when they think they get a whiff of the good stuff.  Investor judgment became as clouded in this space as my puns are bad.

As an example, (It is against company policy for me to mention the names of Cannabis stocks, so I’ll use a made-up name, but the information is accurate.) Big Smoke traded in April of 2014 as high as about $4. It dropped over the next 16 months to about $1.15. Then climbed back to the $2 range for the better part of a year. Then it went parabolic. It ran like a house on fire from June to November 2016 all the way to around $14.40. In less than 5 months it generated greater than a 600% gain. Shortly after the US presidential election, like most stocks in this sector, prices plummeted, it lost more than 60% of its value over the next several weeks. At the time of this writing it is trading below $8.00 per share. This is still a handsome gain for an investor who bought in at $4 or below. But many didn’t, with a lot of their investment going up in smoke. These comments are no reflection on the actual company, but illustrate investor behavior.

So What of It?

The good news is that the party isn’t over in this sector. If investors who bought in too high do some homework and are patient, I believe they will recover and do well. I believe investors need to understand this is a very young industry (at least from a legal perspective) that is fraught with risk. The largest companies in this space are still relatively small companies. There will be growth challenges from many areas: raising capital, government regulations home and abroad, and competition to name a few. To do well, you need to hitch your cart to the right horse.

If you discover the exceptional and unique, have you found it too late, early, or at the right time? Can you do a reasonable assessment to get a sense of what the true opportunity and risks are? Is it filling a void in the market, does it have competition, does it have a competitive advantage in both product and management, is it adequately capitalized?

Capitalism is neither kind nor cruel, it will give and it will take. It will only do what is in its own best interest. Capitalism is you and I and the rest of society. We dictate who will win and lose by our spending habits. But just because you spend one way doesn’t mean the majority agree with you. So how you spend and how you invest may be entirely different.