Reefer Madness

USA 

Amplify becomes latest sheep in marijuana flock

Small American ETF providers are stampeding like sheep to the marijuana paddock.
This is the third Cannabis related product in the last week, in fact nothing has been launched in the US that hasn’t be marijuana related in that period. (TOKE, THCX and now CNBS)

The latest to join the flock is Amplify ETFs, which is listing the Amplify Seymour Cannabis ETF (CNBS). The fund is set to hit exchanges in the following weeks. The fund will be actively managed by CNBC Fast Money talking head Tim Seymour, who the fund is named after. Mr Seymour has a lot of relevant marijuana investing experience, Amplify says on its website.

CNBS will look for companies that make more than 50% of their money from cannabis and hemp, and will invest in companies at every point in the value chain. It will only invest in companies which trigger no legal issues for US investors. (Marijuana use is legal in some US states but not federally).

The fund charges 0.79%

Analysis – a sympathetic bubble

There’s two ideas about why bubbles persist in public equity markets. One idea is sympathetic, the other one isn’t. The sympathetic one comes from George Soros and Peter Lynch. It’s the idea that bubbles are mostly rational and that it can be safer to join them than dodge them. 

The nifty fifty bubble in the 1970s was based on the rational idea that McDonalds, IBM, Coca-Cola, Pfizer etc. were outstanding companies and would be profitable for many years to come. The dotcom bubble in the 1990s was based on the rational idea that the internet was the future. The housing bubble of the 2000s was based on the rational idea that housing is indispensable.

Take these well-grounded views, together with Peter Lynch’s maxim: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves,” and you have a sympathetic explanation for the persistence of bubbles. 

The unsympathetic interpretation is that people are greedy. As Bruce Greenwald, the Columbia business professor, put things: “people will systematically overpay for the dream of getting rich quickly.” People who buy into bubbles know they should put their money somewhere safe and wait for compounding. But, like Veruca Salt in Willy Wonka & The Chocolate Factory, they want a golden goose and they want it now.

This matters for today’s listing of course because it is possible that marijuana stocks are in a bubble. For those considering buying today’s product, get ready for what could be a lot of volatility. (And no, active management doesn’t offer downside protection). But in the event marijuana is not a bubble, today’s listing could be a great way to make a lot of money.