Investment Vehicles Articles

Article / Updated 05-26-2022

Many trend‐following trading systems use a moving average for their starting points. In this trend‐following example, the system is designed for position trading, which means you use a relatively long moving average. Short selling isn’t permitted with this simple system. The first step is to define buy and sell rules for your initial testing. The actual code for defining these rules depends on your specific system‐development package. Therefore, trading rules are described as generally as possible. The rules for an initial test may look like this: Buy at tomorrow’s opening price when today’s price crosses and closes above the 50‐day exponential moving average (EMA). Sell at tomorrow’s opening price when today’s price crosses and closes below the 50‐day EMA. To test whether using a moving average as a starting point is a good idea in a trend‐following system, apply these two rules to ten years of historical data for the stocks of your choice. After testing this idea, you find that this simple system works fairly well when stock prices are trending, but it’s likely to trigger many losing trades when the prices of stocks are range bound. You can try to avoid these losing trades, and possibly improve your overall trading results, by filtering out trading‐range situations. One way to accomplish that goal is by changing the buy rule to read as follows: Buy at tomorrow’s open when the following conditions are true: Today’s closing price is above the 50‐day EMA. The stock crossed above the 50‐day EMA sometime during the last 5 days. Today’s 50‐day EMA is greater than the 50‐day EMA from 5 days ago. These added conditions serve as signal confirmation. When you test these rules, you find they reduce the number of whipsaw trades for most stocks, but they’re also likely to delay buy and sell signals on profitable trades and thus usually result in smaller profits on those trades. However, this adjustment makes the overall system more profitable because the number of losses is reduced. You can find out whether other changes that you can make in your simple system can actually improve profitability. You may, for example, test different types of moving averages. Try, for example, a simple moving average (SMA) instead of an exponential moving average (EMA). Or you may want to try using different time frames for your moving average, such as 9‐day, 25‐day, or 100‐day moving ­averages. Identifying system‐optimization pitfalls Most system‐development and testing software comes equipped with a provision for system optimization, which allows you to fine‐tune the technical analysis tools used in your trading system. You can, for example, tell the system to find the time frame of the moving average that produces the highest profit for one stock and then ask it to do the same thing for a different stock. Some systems enable you to test this factor simultaneously for many stocks. Although this approach is alluring, using it is likely to cause you trouble. If you find, for example, that a 22‐day moving average works best for one stock, a 37‐day moving average works best for the next stock, and another stock performs best using a 74‐day moving average, you’re going to run into problems. The set of circumstances leading to these optimized results won’t likely repeat in precisely the same way again in the future. It’s almost guaranteed that whatever optimized parameters you may find for these moving averages won’t be the optimal choices when trading real capital. This is a simple example of a problem that’s well known to scientists and economists who build mathematic models to forecast future events. It’s called curve fitting because you’re molding your model to fit the historical data. You can expend quite a bit of effort fine‐tuning a system to identify all the major trends and turning points in historical data for a particular stock, but that effort isn’t likely to result in future trading profits. In that case, your optimized system is more likely to cause a long string of losses rather than profits. Testing a long moving average and comparing the results to a short moving average is fine, and so is testing a few points in between a long moving average and a short moving average. As long as you use this exercise to understand why short moving averages work best for short‐term trades and why longer moving averages work better for traders with longer trading horizons, you’ll be fine. Otherwise, you’re probably moving into the realm of curve fitting and becoming frustrated with your actual trading results. Testing with blind simulation Blind simulation is a method for setting aside enough historical data so you can test your system‐optimization results and avoid the problem of curve fitting. For example, you may test data from 1990 through 1999 and thus exclude data from 2000 through the present. After you’ve developed a system that looks good enough for you to base your trades on, you can then test your system against the data that was excluded. If the system performs as well with the excluded data as it did with the original test data, you may have a system worth trading. If it fails, you obviously need to rethink your system. Another approach is choosing your historical data with extreme care. You can expect trend‐following systems like a moving‐average system to perform well during long, powerful trends. If your stock had a strong run up during the long‐lasting 1990s bull market, that kind of price data can skew your results, magically making any trend‐following system appear profitable. Whether that success actually can be duplicated during a subsequent bull market, however, must first be thoroughly tested. If the majority of your profits come from a single trade or only a small number of trades, the system probably won’t perform well when you begin trading real money. You may want to address this problem by excluding periods from your test data when your stock was doing exceptionally well or when the results of any trades were significantly more profitable than the average trade. This technique is a valid approach to eliminating the extraordinary results arising from extraordinary situations in your historical data. Using it should give you a better idea of your system’s potential for generating real profits in the future.

Cheat Sheet / Updated 05-03-2022

Make smart trading decisions using candlestick charting. This cheat sheet shows you how to read the data that makes up a candlestick chart, figure out how to analyze a candlestick chart, and identify some common candlestick patterns.

Cheat Sheet / Updated 05-03-2022

The major commodities exchanges trade specific commodities worldwide, and the main regulatory organizations provide information and enforce codes to protect commodities investors. When investing in commodities, use guidelines and advice from the experts to lower your risks.

Cheat Sheet / Updated 04-26-2022

The practicality of trend trading is that you're waiting for the market to "show its hand" by establishing a clear direction and then jumping onboard for the ride. This handy Cheat Sheet provides an overview of how to follow the big-money market players to the glorious land of profitability. Get tips on why trend trading works so well, how to determine a trend that will continue after you enter the market, and how to manage your risk once you're in a trade.

Article / Updated 03-31-2022

You’ll find no shortage of investing strategies and schemes online for earning a fortune trading stocks, but no magic formula exists. If such a formula did exist, the person who discovered it probably wouldn’t be so eager to share it or to try to make money selling the “foolproof” technique. You can also find plenty of investment gurus online touting the best cannabis companies or stocks to invest in or predicting what will be the next big thing in cannabis, but can you really trust them? The most profitable and safest way to invest in cannabis is no secret: Put your money in the best companies. While that certainly sounds easy enough, how do you know which cannabis companies are best? How do you really know that a company will be successful and that you’ll earn a good return on your investment? The answer is, you don’t. However, you can increase your odds by investing in profitable businesses, or businesses that have what it takes to be profitable. Following are 11 criteria for choosing a business to invest in. A business doesn’t have to meet all ten criteria to be a good investment. For example, if a business has a great management team, the fact that the business isn’t profitable yet may be less important. However, you should consider all these criteria before investing in any cannabis business. Experienced and successful management team I cannot stress enough the importance of vetting the people who are running the business. These are the folks who will make or break the business (and your investment), so you want to be sure they’re knowledgeable and experienced in both cannabis and running a business, and that they don’t have a history of failed business ventures. Here’s what to look for: Any past criminal activity that could be a warning sign that the business is not legitimate, such as past Securities and Exchange Commission (SEC) violations Cannabis knowledge and experience Business management knowledge and experience No long track record of failed business ventures A positive reputation — respected in the cannabis industry or in business circles An individual rarely has all of the qualities needed to run a successful cannabis business. For example, someone with loads of cannabis knowledge and experience may not have business or people management expertise. However, the management team, as a group, should have all of the knowledge, skills, and experience required. Steady revenue growth Revenue growth is a good indicator of a business’ success, showing whether sales are increasing or decreasing. If revenue growth is steady or negative, the business is failing to remain competitive. Check the business’ revenue from month to month and from quarter to quarter. If the company has been in business for several years, look at its annual revenue from one year to the next. You can find a company’s revenue on its income statement. To compare revenue growth between two or more businesses, convert the dollar values to percentages. Start with this year’s revenue, subtract the revenue from the same period last year, divide the result by last year’s revenue, and then multiply by 100. Note that you don’t need to know the revenue for an entire year to make this calculation. For example, suppose it’s July, so the business only has revenue from the first six months of this year. This year, the company had $10 million in revenue. For the first half of last year, the company had $8 million in revenue. Its revenue growth as a percentage is: ($10 million – $8 million)/$8 million x 100 = 25% Consistent profit growth Profit is total revenue minus total expenses. A positive result means the business has earned more than it has spent. A well-run business shows growth not only in revenue but also in net profit. Negative or declining profit growth with rising revenue growth could be a sign that a business’ operational efficiency is dropping — that revenue isn’t keeping up with increases in expenses to operate the business. A negative profit margin (revenue minus expenses) is not necessarily bad. Successful businesses often operate at a loss when they’re investing toward future growth. If profit growth is negative or declining, dig deeper to find out what the business is investing in, how it’s getting the money to continue operating, and, if it is borrowing money, whether it has the means to make the loan payments. Comparatively low price-to-earnings ratio What is the price-to-earnings (P/E) ratio? It is a stock’s share price divided by its earnings per share, which is the company’s total profits divided by the number of shares. Suppose a stock’s share price is $10, its annual profit is $1 million, and the total number of shares is 500,000. Earnings per share is $1 million divided by 500,000, which equals $2 per share. The P/E ratio is $2 divided by $10, which is a ratio of 5 to 1. By itself, the P/E ratio doesn’t tell you much, but when you compare it to the P/E ratios of other companies in the same business, it’s a good indicator of whether a stock’s price reflects the company’s value. A comparatively low P/E ratio may indicate a good value for your investment. Don’t consider the P/E ratio in a vacuum. A company that’s growing fast and investing heavily in that growth may have a high P/E ratio but be a better investment than a company that’s more profitable now but is losing market share. Positive money flow indicator One way to gauge a company’s value is to check the money flow index (MFI), which measures the momentum of a security by looking at movements of trading volume and price. If investment dollars are flowing toward one company and away from another, this trend could be a sign that the company drawing more investor interest is on its way up, while the other company is on its way down. The MFI falls into the realm of technical analysis, and it may not be the best indicator of a company’s health. A rising share price could be an indicator of a pump-and-dump scheme or simply that the company’s name was mentioned in a news article that shed a positive light on it. It’s more an indicator of investor sentiment than the health and vitality of the business. Expanding free cash flow When a company has a positive cash flow (is earning more than it’s spending), it has money to reinvest in the business, settle debts, pay expenses, build a buffer against future financial setbacks, and even share its profits with investors. Generally speaking, you want to invest in companies that demonstrate an increasingly positive cash flow. In a young industry like cannabis, in which businesses are just getting started, fewer businesses are likely to have a positive cash flow, let alone an expanding free cash flow. They’re more focused on getting started and growing. In addition, too much free cash flow could be a sign that the business isn’t spending enough money for growth or isn’t leveraging the money it has as optimally as possible. Operations in other states or countries Due to laws prohibiting the sale and transportation of marijuana across borders, cannabis businesses often struggle to survive in their own jurisdictions and face even greater challenges establishing operations in other states and countries. However, those that are successful in increasing their reach tend to be impacted less by challenges or setbacks in individual markets. In addition, they’re better positioned to expand into other markets as marijuana laws are relaxed. Growing market Markets for certain products expand and contract. For example, the market for vape products in the cannabis industry is huge, because many consumers want a similar experience to smoking it, without the smoke. However, when people started getting sick from black market vaping products, the vape market took a huge hit. It has since recovered, but this example shows how industries can be affected by new products (vapes) and news. Before investing in a company, consider how well it caters to current consumer demand and how well it adjusts to changes in consumer demand. In many ways, the cannabis industry is like the smartphone industry — to be successful, a cannabis company must be able to stay ahead of the curve on consumer demand. Increasing market share The cannabis industry is highly competitive, and demand for product isn’t unlimited. To grow, businesses must increase their share of the pie; they can’t simply make more pie (increase demand). And, the ability to grow by expanding into different markets is often restricted by legal and regulatory issues. So, when investing in cannabis, look for companies with increasing market share. You may be able to find out a cannabis company’s market share by researching on cannabis business news sites. Or, you can search these same sites to find out the total revenue for the industry in the country or state in which the company operates and then divide the company’s revenue by the industry’s revenue for that same period. Positive reputation in the industry As you immerse yourself in the cannabis industry and read cannabis newsletters and other publications, you’ll begin to notice the names of companies and people appearing again and again. Pay close attention to which companies and people seem to be leading the industry. Which people are renowned authorities in the industry? Which companies and people seem to be the most highly respected? Then, research these companies and individuals to find out what they’re doing and what they’re saying about other businesses and individuals in the industry. As you begin to identify the movers and shakers in the industry, you’ll develop a better sense of where to invest your money. Who’s partnering with whom? Where are cannabis companies going to buy the products and services they need? You can often tell a lot about a company by looking at its business associates. Manageable debt Plenty of companies, including cannabis companies, struggle with solvency. Excessive debt is a key issue in today’s economy. When domestic energy became a hot industry a few years ago, many of those companies ultimately went bankrupt due to unsustainable debt. Imagine if you didn’t have enough income to cover your mortgage, utility bills, and credit card payments — the same thing can happen to businesses. Managing debt is a critical success factor especially for cannabis (or any) companies that are not yet profitable. You also want to look at the debt holder. Some companies, particularly those that seek aged debt, are toxic lenders. Avoid any company that has debt holders with convertible notes or aged debt — it’s a killer.

Article / Updated 03-31-2022

When discussions arise about the legality of cannabis, they usually revolve around growing it, selling it, or possessing it. However, cannabis laws and the enforcement of those laws also impact the industry, influencing everything from where different cannabis businesses can operate and under what conditions, to the taxes and fees they pay and, ultimately, the cost and availability of the product. Complications and confusion often arise over differences in laws and regulations at the federal, state, and local levels. For example, in the U.S., cannabis is illegal at the federal level, legal for medical use in many states, legal for both medical and adult use in several states, and prohibited for sale and possession in many municipalities within states where it’s legal. In 2013, Uruguay became the first country to officially legalize cannabis for both medical and adult use. In 2018, Canada became the second country and the first G7 member to legalize cannabis. In the provinces of Quebec and Alberta, the legal age is 18; in the remainder of the country, it’s 19. In New Jersey, before voters even had a chance to vote on a proposition to legalize adult-use marijuana, more than 50 local governments already had passed laws banning its sale or possession. This article brings you up to speed on federal, state, local, and international marijuana laws in the hopes that by knowing the laws, you’ll be better prepared to ride the waves that are sure to rock the cannabis industry as its future unfolds. U.S. cannabis federal law and enforcement In the U.S., in the 1800s, marijuana was used as an ingredient in many medicinal products sold in pharmacies across the country, but by 1931, 29 states had outlawed it, citing research at the time that linked the use of marijuana with violence, criminal activity, and other deviant social behaviors. Federal regulation didn’t occur until President Franklin D. Roosevelt signed the Marihuana Tax Act of 1937, which required every person who sold, acquired, dispensed, or possessed marijuana to register with the Internal Revenue Service (IRS), pay taxes on their transactions, and complete an order form that required the name and address of both buyer and seller and the amount of marijuana being sold or bought. Although the act did not specifically criminalize marijuana, it came to be used in that way. In 1970, the Supreme Court overturned the law, and Congress repealed it but simultaneously passed the Controlled Substances Act, designating marijuana a Schedule 1 controlled substance based on the belief that it had a high potential for abuse, no currently accepted medical use, and a lack of accepted safety regarding the use of the drug. Adding marijuana to the list of Schedule 1 controlled substances (along with heroin, LSD, ecstasy, and magic mushrooms) effectively made it illegal for anything other than very limited research. In particular, the following activities are federal crimes: Transporting cannabis across any state line, even if it’s transported from one state in which it’s legal directly to another. Flying with cannabis, because it enters into federal airspace. Possessing or using marijuana on federal land, including national parks and forests. Federal laws and their enforcement impact cannabis businesses and investors in the following ways: Because transporting cannabis across state lines is illegal, cannabis businesses that want to expand sales into other states must duplicate their operations in those states. They can’t take advantage of economies of scale simply by shipping their products across state lines. The Bank Secrecy Act (BSA) and federal money-laundering statutes discourage banks from offering services to cannabis businesses. (Passed in 1970, the BSA is a U.S. law that requires financial institutions in the U.S. to assist federal agencies in detecting and preventing money laundering.) Violations can result in steep fines and imprisonment of bank officials. Inaccessibility to basic banking services increases the costs and complexities of operating cannabis businesses. Some banks are starting to serve cannabis businesses, and the Financial Crimes Enforcement Network, the financial intelligence unit of the U.S. Department of Treasury, offers guidance to banks on how to comply with regulations when serving marijuana and ancillary businesses. However, compliance places an added burden on banks to police the marijuana businesses they serve. In addition, the Department of Justice reserves the right to prosecute banks for working with these businesses, which face these obstacles: Without basic banking services, cannabis businesses have no access to the capital markets, which are useful for raising money for development and growth. They need to rely on private investors, which provides private investment opportunities but at a very high risk. According to the principles of contract law, any contract in breach of public policy is void and unenforceable, which is a major concern for investors or funds regarding any investment contract’s legitimacy. This concern serves as another obstacle to cannabis businesses seeking to raise investment capital for development or expansion. Cannabis businesses are required to pay income taxes, but filing tax returns (federal and state) constitutes self-incrimination. In addition, without banking services, cannabis businesses must pay their taxes in cash, which is inconvenient, costly, and risky. Due to the 280E provision in the IRS tax code, cannabis businesses are prohibited from deducting ordinary business expenses from their gross income, thereby significantly increasing their tax burden and negatively impacting their profitability. Bankruptcy protections are unavailable for cannabis businesses in the U.S. Without the option to restructure, cannabis businesses are often forced to shut down when they encounter credit issues. As a result, creditors may have difficulty collecting their debts, which discourages them from loaning money to cannabis businesses in the first place. Fear among potential customers of losing a federal job, student financial aid, the right to own a firearm, or eligibility for federally subsidized housing can put downward pressure on cannabis sales. If marijuana is legalized at the federal level, the entire business environment will change, allowing large, well-established companies in other industries, such as alcohol, tobacco, and pharmaceuticals, to compete for market share. So, what does this mean for investors? Regulations generally move in a direction that favors growth and investment opportunity. At this time, more than two-thirds of Americans live in a jurisdiction that has some form of legal cannabis. The country is trending toward a repeal of prohibition, but that will likely be a slow and clumsy process from a regulatory standpoint. If you’re looking to invest in licenses and permits, consider states with a more limited number of granted permits. States that limit the number of permits make those permits more valuable by doing so. You also want to consider states that have constitutions providing for voter referendums. As you do, you’ll notice that most states that allow for referendums are west of the Mississippi and business friendly. There’s a historical reason for that. Those states joined the union in the 19th century, and their state constitutions are based on the Spanish and French democratic models that allow voters to pass laws by referendum. As a result, and generally speaking, states with voter referendum and business-friendly regulatory environments tend to have legislation providing for some degree of legalized cannabis. Be careful when you’re considering investing in any company whose licenses are based on narrow zoning laws. I’ve invested in real estate that was once coveted because it was zoned for cannabis only to have the city loosen its zoning restrictions six months later. I paid a premium for the property, only to see its value drop when zoning laws made more real estate available for cannabis businesses. I could have avoided that mistake by researching more thoroughly what was on the ballot or what was being discussed by the zoning committee. Keep an eye on the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, which would amend the Controlled Substances Act (CSA) so that any state-legal cannabis activity would no longer be considered illegal under federal law. The STATES Act would also solve the cannabis banking problem, because the federal money-laundering statute is triggered only for illegal activities. Likewise, because the 280E provision applies only to revenue generated by illegal means, cannabis businesses would be able to deduct their business expenses just like any legal business. Although the STATES Act has bipartisan support and was passed by a large margin in the House of Representatives, as of this writing, the bill was hung up in the Senate. The Cole Memorandum During the Obama administration, on August 29, 2013, U.S. Deputy Attorney General James M. Cole issued a trio of memos, including the Cole Memorandum, to all U.S. attorneys general. The memo informed them that due to limited resources, the U.S. Department of Justice would not be enforcing federal marijuana prohibition in states that legalized and effectively regulated and enforced their own marijuana laws. The memo directed the state attorneys general to “not focus federal resources in your states on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.” Instead, states were encouraged to address federal priorities, for example, “by implementing effective measures to prevent diversion of marijuana outside the regulated system and to other states, prohibiting access to marijuana by minors, and replacing an illicit marijuana trade that funds criminal enterprises with a tightly regulated market in which revenues are tracked and accounted for.” This memo was rescinded under the Trump administration in January 2018 by Attorney General Jeff Sessions. The impact of the rescission in individual states has yet to be determined, but it’s a cause for concern because it indicates that the feds may be leaning toward greater enforcement of the federal prohibition of marijuana. State cannabis laws Although cannabis is federally illegal, each state has the right to legalize it within its borders and set the rules and regulations for personal and commercial growth, production, transportation, sale, possession, and use. States fall into one of the following five categories: Fully legal: Both medicinal and adult use are allowed. Fully illegal: No medicinal or adult use is allowed or decriminalized (see the final item in this list for more about decriminalization). Medical and decriminalized: Medical use is legal, and possession and use is decriminalized. Medical only: Marijuana is legalized only for medical use, which in some states allows only cannabidiol (CBD) oil use (CBD doesn’t contain the psychoactive ingredient THC). Decriminalized: Possessing or using small amounts of marijuana will not lead to arrest, prosecution, prison time, or a criminal record (decriminalization details vary by state). The easiest way to find out where each state in the U.S. stands on legalization is to search the web for “marijuana legal states.” You’ll see a color-coded map like the one shown. State marijuana laws change frequently, so access a map from a reliable source that has current information. State laws and enforcement of those laws can negatively impact cannabis businesses and investors in several ways, including the following: Every state in which marijuana is legal has numerous rules and regulations that apply to marijuana growers, producers, sellers, and distributors. These rules and regulations govern everything from verifying the identities of buyers to packing, labeling, and tracking products, and all of them add to the cost and complexity of doing business. Marijuana taxes vary by state, with adult-use marijuana typically taxed at a much higher rate than medical marijuana. Higher taxes add to the product cost and can drive sales to illegal sellers, negatively impacting sales for legal businesses. States vary in the number of legal cannabis businesses they allow, how much they charge for licenses, and how quickly they implement legalization, which can all impact how successful cannabis businesses are in each state. Some states require marijuana businesses to reserve large amounts of cash before applying for a license. This practice encourages rolling up marijuana businesses—a method that involves acquiring and merging small businesses to increase their collective value. In these states, large marijuana businesses have a distinct advantage over smaller operations. State laws may stipulate residency requirements for investors in cannabis businesses. Some states in which marijuana is legal are less stringent in enforcing laws against illegal sales, which can negatively impact sales for legal businesses. Local laws In states where cannabis is legal, local municipalities can separately regulate its growth, production, and sale within their borders. They are also allowed to add taxes and fees to commercial efforts above and beyond those of the state. In some cases, municipalities can completely ban commercial endeavors. For example, Colorado Springs permits medical sales but has continued to ban adult-use dispensaries. Penalties can vary significantly from one municipality to another. These variations and costs can negatively impact the sales and profits of cannabis businesses, even in states in which cannabis is legal. Cannabis laws in other countries As an investor, you want to know about a cannabis company’s range of operations—specifically, the countries it serves around the world. A company that operates in several countries may be less susceptible to changes in laws and regulations than a company operating in only one country. In addition, a company’s global reach reflects its ambitions for growth. Here’s a list of countries in which cannabis is legal or decriminalized to some degree: Australia Canada Germany Italy Mexico The Netherlands New Zealand South Korea Spain Switzerland Uruguay S. Virgin Islands Carefully research each market before investing in companies that operate in it. Examine the laws and enforcement of those laws, cannabis demand, the costs of doing business, competition from illegal sellers, and other factors to gain a better understanding of the potential for sales, profits, and growth, as well as the risks involved.

Article / Updated 03-31-2022

You’re going to invest in cannabis. Remember that investing in cannabis is risky business. Many people who invested years ago got the jitters, sold their shares, and lost a lot of money. Some people lost money to con artists or well-intentioned friends or family members. Others lost out because they invested in cannabis businesses that didn’t make it. However, as long as you’re well aware of the risks, if you decide to move forward, I applaud your bold initiative, and I hope you receive ample compensation for your risk-taking. People like you are the ones who drive innovation and fuel the success of new industries such as cannabis. Still, I’m going to take this opportunity to caution you in the hopes that the risks persuade you to tread carefully — to do your homework and perform your due diligence. Savvy investors stand to earn handsome returns on their investments as long as they make smart investments. Those who rush in and are clueless and careless will lose their shirts. Following are 10 reasons for not investing in cannabis. Keep these reasons in mind as you seek your fortune in the green rush. Marijuana is still federally illegal in the United States Although momentum seems in favor of federal legalization of marijuana sometime in the future, nobody has a crystal ball that can tell them for sure what will happen. A new study might come out revealing some currently unknown harmful effect that makes legislators who are already against legalization dig in their heels. Or, some other unforeseen event or change in culture or beliefs could cause voters to become less accepting of marijuana use. Who knows? Until marijuana is federally legal, the federal laws against it will restrict growth in the industry in several ways, including the following: Increase the cost of doing business Continue to fuel the black market for cannabis Complicate and increase the cost of expanding businesses across state lines and into foreign markets Make banking and other financial services less available for cannabis businesses When you invest in cannabis, to a certain degree, you’re betting that it will ultimately become legal on a federal level. I believe that will happen, eventually, but it’s not a sure thing, and even if it were, nobody knows when it will happen. Marijuana investment scams are rampant Con artists profit on the human desire to have a better life. Some would call that greed, but I really think most people just want to have enough money to pursue their dreams. Many people see cannabis as the next gold rush. In fact, the recent boom in legal cannabis companies has been described as a “green rush.” Everyone wants to get in on the action and not to miss out on the opportunity to profit from this exciting new industry. And that’s exactly what makes people vulnerable to scams — that and the fact that people generally trust others. Con artists know that people are eager to invest in cannabis, so whenever someone expresses this eagerness, they become a target. Of course, the threat of a scam isn’t reason enough to avoid investing in cannabis, but it is a good reason to remain skeptical of opportunities that seem too good to be true. Earning a profit as a cannabis business is a huge challenge As an investor, you’re wise to invest in profitable businesses or at least those that have a good chance of being highly profitable. Unfortunately, cannabis is a heavily taxed and regulated industry, which increases the costs and complexities of doing business. It’s not like selling bottled water. Here are a few line items that take a huge bite out of cannabis business profits: Taxes. Cannabis businesses are prohibited from claiming business deductions on their federal taxes. Also, the high sales and excise taxes on cannabis products reduce demand and steer sales to the black market. Application and licensing fees. Application and licensing fees for legitimate cannabis businesses can be exorbitant in some states; for example, Connecticut charges a $25,000 application fee and a cultivation licensing fee of $75,000. In addition, businesses often must hire a lawyer to navigate the process. Capital requirements. Many states require cannabis businesses to hold a certain minimum in liquid assets (typically hundreds of thousands of dollars) to obtain and keep their license. Compliance costs. Companies often incur high legal costs and must purchase specialized software to remain compliant because most states require tracking cannabis “from seed to sale.” I could go on, but the point is that earning a profit in cannabis isn’t easy, and until it becomes easier, cannabis businesses will have a tough time proving their value to investors. Illegal operations undermine demand for legal products In many areas where cannabis is legal, the black market continues to thrive because 1) cannabis is often cheaper on the black market where businesses don’t pay taxes or application and licensing fees and don’t incur the costs of attorneys and compliance, and 2) the cannabis community is sort of anti-establishment, so many consumers prefer to buy from unlicensed growers and dealers. In addition, in many states in which cannabis is legal, people are allowed to grow a certain number of cannabis plants of their own. They need to buy seeds, fertilizer, and maybe the equipment to set up a grow room, which gives suppliers of those items additional business, but it decreases demand from commercial growers, manufacturers, and dispensaries. The industry is very fragmented The cannabis industry consists mostly of small businesses competing against one another, which means businesses will come and go. Some will fail, and some will succeed. Eventually, as cannabis legalization grows, large national companies will step in and either buy up competing companies or drive them out of business. People who invest in cannabis now, when the industry is fragmented, are likely to experience losses as some of the companies they “bet on” fall to the competition. The take-home message here is that if you’re accustomed to trading in companies listed on the major stock exchanges, such as the NYSE and Nasdaq, now may not be the best time to invest in cannabis. You may want to wait until the industry starts to consolidate; then, you’ll have an easier time predicting winners and losers. Oversupply is more likely than not Many states in which cannabis is legal face problems with oversupply — too many growers growing more cannabis than the consumers in the state want or need. Oversupply drives down prices and profits and makes companies less attractive to investors. Oversupply is another problem that’s at least partially due to the fact that cannabis is illegal on a federal level. If cannabis were legal federally, or if growers could at least ship their products over state lines, they’d have a larger market in which to sell and compete. As it is now, states must deal with the problem of oversupply internally, which usually means issuing fewer licenses to cultivators or charging significantly more for applications and licenses. Bad news is just around the corner To a large degree, rumors and news drive the stock market. In fact, some investment gurus advise to “buy on the rumor and sell on the news.” With cannabis, the opportunity for bad news is pretty high. In 2018, good news (mostly a combination of hype and hope) drove share prices in cannabis companies sky high. Shortly thereafter, the bad news (mostly poor earnings reports from some of the major players) led to a massive selloff. This boom-to-bust cycle is likely to continue because hype and hope continue to motivate investors in this industry. In addition, because cannabis is a drug, both good news about its benefits and bad news about its side effects are likely to contribute to the volatility. There is money to be made by investing in cannabis, but I urge you to invest with your head and not your heart. Carefully research each company’s fundamentals and be sure the share price is supported by those fundamentals. Marijuana laws are slow to change As long as marijuana remains illegal at the federal level, many states are going to drag their feet over legalization, and local jurisdictions are going to use the federal law as an excuse to pass their own restrictions on its sale and use. When the federal prohibition of marijuana will end is anybody’s guess. I think it’s likely to happen the next time the Democrats control the White House and Congress, which might happen before this book is published, four years later, or maybe even a much longer time from now. Company shares are being diluted Companies can secure financing through debt (borrowing) or equity (selling shares in the company), which is true of all companies. What’s different about cannabis companies is that they have trouble securing loans from banks, so they have to rely more on equity. When they get in a financial pinch, if they can’t get a loan, they need to sell more shares, and the more shares they sell, the more diluted the price of existing shares becomes. Unfortunately, investors have little control over decisions to issue more shares, even though that decision impacts the value of their investment. Shares can be diluted in any sector, any industry, and any company, but the possibility is higher among cannabis companies. Demand is unpredictable Several states that have legalized marijuana are finding that demand can be unpredictable for a variety of reasons, including the following: Cross-border sales may increase demand for marijuana in legal states surrounded by illegal states. However, when bordering states legalize it, cross-border sales decline. Any black-market sales reduce demand for legal cannabis. Any bad news about negative side effects reduces demand, although the drop in demand is usually short-lived. Whether demand for cannabis will increase or decrease with its legalization is hotly debated. I think demand is almost certain to rise with legalization, but others think it could fall as marijuana loses its appeal as a “forbidden fruit.”

Article / Updated 03-31-2022

One of the key benefits of the Marijuana Stock Universe and the Daily Marijuana Observer’s database is that they cover a wide range of exchanges and markets on which cannabis stocks are traded, including over-the-counter (OTC) stocks. OTC stocks (many of which are penny stocks, meaning they sell for less than five bucks a share) are stocks that aren’t listed on the major exchanges, such as the New York Stock Exchange, Nasdaq, or the Toronto Stock Exchange. The Daily Marijuana Observer’s list of OTC cannabis stocks The Daily Marijuana Observer’s OTC-Listed Cannabis Stocks Database is another excellent resource for tracking down over-the-counter cannabis stocks. You can search for stocks by name or ticker symbol or use the filters listed off to the side of the page to browse stocks by country, exchange, or sector. To access the OTC-Listed Cannabis Stocks Database, go to mjobserver.com, select Databases (from the menu bar at the top), click Cannabis Stocks, and under Browse a List of All Cannabis Stocks, click Visit Database. You can then browse and search the database in the following ways: Click in the text box below “Search Cannabis Stocks,” type a company name or ticker symbol, and click the Search button. Scroll down the list and use the Next button at the bottom of the list to view additional listings. Use the filters on the right side of the page to narrow the list by country, exchange, or sector. For example, under Browse Stocks by Country, you can choose to view All Cannabis Stocks or only those from certain countries: Australia, Canada, Germany, Israel, the U.K., or the U.S. Use the Sort By options above the list (and off to the right) to sort the list by rating, rating count, or company name. (Click the Sort By option again to flip the order of the list, if desired.) When you find a company or stock that interests you, click the View button (in the lower-right corner of the company’s listing) to view charts and details about that company or stock. Different exchanges and markets Exchanges and marketplaces covered by the Marijuana Stock Universe and Daily Marijuana Observer’s OTC database include the following: OTCPK: OTC Pink (or OTCPK) is the lowest and most speculative of the three tiers of stocks trading over the counter. Companies listed on the OTCPK market don’t have to meet any disclosure requirements or financial standards and could include companies in default or financial distress. I recommend steering clear of these stocks at least until you’ve built a track record of success trading OTC stocks in the higher tiers. OTCQB: Commonly referred to as “The Venture Market,” OTCQB is the middle tier of stocks trading over the counter. Companies listed in this market are early-stage and developing U.S. and international companies that don’t yet qualify for the higher OTCQX tier. To be included in this market, companies must meet minimum reporting standards, pass a bid test, and undergo annual verification. OTCQX: This is the top tier of the three OTC stocks and includes blue-chip (well-known, established) companies that aren’t listed on the more traditional exchanges (such as NYSE and Nasdaq). To qualify to be listed on the OTCQX, companies must follow certain rules and criteria and are subject to Securities and Exchange Commission (SEC) regulation. Penny stocks are excluded from this market. CV EM: Short for caveat emptor, which is Latin for “buyer beware,” CV EM is a special designation for OTC stocks to warn investors to take special care and perform thorough due diligence before buying shares in the company. Grays: The term “grays” refers to Gray Sheet stocks, which are usually shares in startups or spin-offs that are sold publicly but before they’re officially available for trading on a stock exchange or other financial market. You could find some great deals here or some real lemons. NYSE American: Formerly known as the American Stock Exchange (AMEX) and more recently as NYSE MKT, NYSE American is similar to the NYSE, but it deals mainly in small- and mid-cap stocks and derivatives, so it’s likely to offer a wider variety of cannabis stocks than what’s listed on the NYSE. CSE: Short for Canadian Securities Exchange, CSE is an alternative stock exchange in Canada that offers simplified reporting requirements and reduced barriers to listing for Canadian companies. This makes it easier for small cannabis companies to get listed. TSX: The Toronto Stock Exchange (TSX) is one of the largest stock exchanges in North America (listing more than 1,500 companies) and the eighth largest in the world (based on the market capitalization of the companies listed). TSX leans toward listing larger, more established Canadian companies. TSXV: Short for TSX Venture Exchange, TSXV lists smaller Canadian companies that don’t qualify to be listed on the TSX. TSXV is the Canadian equivalent to OTC markets. NSD: Nasdaq is one of the big, formal U.S. stock exchanges. You’ll find stocks for some of the biggest U.S. players in the cannabis space listed on this exchange, but your choice of cannabis stocks will likely be very limited. NYSE: The New York Stock Exchange (NYSE) is the largest stock exchange in the world (in terms of market capitalization of its listed companies). As with the Nasdaq, you’ll find stocks for some of the biggest cannabis companies in the U.S., but smaller companies are underrepresented. Many stock screeners don’t display OTC stocks, which include a vast majority of cannabis stocks. So, when you’re choosing a stock screener, make sure it lists stocks traded on OTC markets; otherwise, your selection of stocks will be severely restricted.

Cheat Sheet / Updated 03-25-2022

You can find hundreds of books on technical analysis and using stock charts to make trading and investing decisions, but if you don't know how to properly build those charts, the information in them may be garbage. Stock Charts For Dummies helps you develop your own charting style to match your own trading and investing style. Here, you get the basics on chart attributes, overlays, indicators, trading techniques, and journaling tips.

Cheat Sheet / Updated 03-22-2022

Dividend investing is nothing new. However, following a dividend-investment strategy is new to many modern investors who've been focused solely on growth investing. If you count yourself among this crowd or are just starting out and plan on investing in dividend stocks, you need to know how to develop your strategy, find and evaluate potentially good dividend stocks, manage your portfolio, and avoid the most common and critical mistakes.