Friday File: Stop Losses and Big Quarters

By Travis Johnson, Stock Gumshoe, September 7, 2018

I keep seeing more and more marijuana teaser ads, and yes, marijuana is an exciting sector right now with legalization in Canada and probably more incremental moves toward legalization of marijuana in the US this next election cycle… but they’re still companies that we have to analyze and understand if we’re to think of these as investments, and I still can’t get comfortable with these kinds of stocks. Which means, essentially, that you’re not buying a company — you’re renting it, hoping that it will be more valuable when you turn it over to the next speculator in a few weeks or months.

That can absolutely work, and there’s a place for speculation, but there’s a lot more luck involved than most of us acknowledge — technical trading doesn’t give me any confidence with a brand-new sector driven by headlines and rapid swings in sentiment, and there are no rational valuation models that you can squeeze most of these companies into, so it becomes, for me, much more like a game of roulette. It’s exciting, and it’s fun to see if the ball lands on black, or on the specific numbers you chose, or whatever your bet is… but a lot of the time, you end up being completely wrong.

I’m not trying to talk anyone out of speculation — I do it, too, though I tend to keep my bets small. I wouldn’t even necessarily say no to placing the odd option bet on these parabolic pot stocks (though I haven’t, since the prices of the options have never seemed reasonable to me, either), but I do hope that nobody takes that moment of thrill from a 900% gain and uses it to justify putting more money into the sector, or turning a speuclative windfall into a “long term hold” without watching how the sector evolves very closely and understanding what the company’s financials might look like in a few years.

Instead of more lecturing and fuddy-duddiness from me, I’ll share a few of Warren Buffett’s words from his 2000 Annual Letter to Berkshire shareholders (if you’re a new investor trying to understand market psychology and long-term thinking and the art of valuing a business, read all of Berkshire’s letters before you do anything else) — he was talking then about the dot-com bubble, but the words help to give us perspective when it comes ...

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