Alan Brochstein – Marijuana Stocks, The Pitfalls & Opportunities

alan brochstein

Alan Brochstein founder of 420 Investor tells you how to understand the universe of cannabis stocks. Alan shows us how to navigate away from 90% of marijuana stocks you don’t want. He also highlights his favorites stocks and how to get started investing.

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Hi, I'm Matthew Kind. Each week I'll take you behind the scenes interview of the insiders that are shipping the rapidly evolving legal marijuana industry. Learn more at Cannainsider.com. That's C-A-N-N-A insider.com. What are the five disruptive trends that will shape the Cannabis industry in the next five years? Find out with your free report at cannainsider.com/trends. That's C-A-N-N-A insider.com/trends.

Now, here's your program. Today we're going to hear the story of Alan Brochstein in his business 420 Investor. Allen is going to educate us on how to sidestep the pitfalls that most marijuana investors fall into. We'll also learn how to navigate the turbulent waters in the marijuana height machine to find a few perils that most investors will never find.

Matthew: Welcome, Alan.

Alan: Hey, Matt. Thanks for having me.

Matthew: Great. Well, thanks for being on the show. Can you give our listeners a little bit of background about yourself and how you got started in the investment world and particularly in cannabis?

Alan: Sure. I've been in the investment industry since graduating college in 1986. I've spent the first 14 years or so in bonds, spent half that time in New York city, came back to my hometown in Houston where I reside now. I worked in equities until 2007. I've been a portfolio manager and analyst in principle at a firm that manage about half a billion dollars investing in mid cap growth. So very fortunate to have been able to transition away from bonds and into stocks much more of my alley. In 2007 I went off on my own. I started providing independent research to several different hedge funds and institutional money managers. I stumbled upon the cannabis market in early 2013 and was totally fascinated. I'm a lifelong libertarian so I believed in cannabis legalization just purely for the simple reason that it should be legal, keep the government out of the bedroom-type argument.

What I didn't know was about the medicinal benefit, but before I go there, as a professional analyst, I looked at this market and was just blown away. The companies were shoddy, evaluations were off the charts. I happen to find this right after the Colorado and Washington elections and things were kind of crazy but I spent the next six months or so really diving into the sector, learning about the medicinal benefits and when Sanjay Gupta, the Chief Medical correspondent in CNN, did this 180 in August of 2013, it really captured my attention and made me kind of commit myself to spending more time. I launched a service 420 Investor which has grown to be one of the largest online communities on the internet right now focused on the cannabis space. I went full time in March of this year, so that's how I spend all my time right now.

Matthew: Okay, and to really talk about cannabis stocks, we really need to educate listeners about what the OTC market is. Can you tell us a little bit about what OTC means and is there any particular gotchas or bigger buyer beware signs that investors should consider when investing in OTC stocks?

Alan: Yeah, this is a great way to start the conversation. This is how actually I start, when we get new subscribers it's the first thing I make sure people see. OTC is over the counter, maybe not everybody is familiar with that term but penny stocks, that's what the vast, vast majority of the sector is. In fact, I tracked over 200 companies, I don't follow them all closely, but I'd say 98% of them are penny stocks. This is very important because the level of disclosure is not nearly as high. A lot of them do file with the SEC, but even in those circumstances these stocks are highly speculative. They need to continue to access capital or they won't be able to stay in business. That's what the investors need to be aware of, these are very speculative. I can't say that loudly enough. This is not my background. My background was in more traditional stocks - SMP, 500 stocks, Russell 2000, small cap stocks, which obviously are risky as well. The risks with OTC stocks or penny stocks are exponentially higher in the market in general.

Matthew: Sure. Has the SEC gotten involved lately kind of putting some of these companies in time out? I forget what the actual term is for that but...

Alan: Yeah, they have. Suspension is the word. This has been one of the interesting things. For your listeners that aren't familiar, just to back up a little bit, after the Colorado and Washington voted to legalize in November of 2012, there were just a handful of, "marijuana stocks." None of them actually had much to do with marijuana but they were perceived to be placed. Kind of like what were going through with the Ebola right now. Nobody really knows these companies necessarily but if they think they might be on to something it gets the speculative juices flowing for traders and maybe even investors. The SEC is interesting. They work hand-in-hand with the FINRA, which is a self-regulatory organization that oversees the market and supposed to protect the investors. FINRA came out in August of 2013 after that massive rally following the Colorado-Washington elections in late 2012 in which the market had doubled basically, early in the year and then sold off, it was actually down year-to-date, and FINRA comes out and they waived their standard warning. They've been doing these things at least since 2001 since 911, because there's one thing constant about penny stocks, the scammers are always there.

It's always like right now it's going to be Ebola but most recently it was marijuana, 3D printing might have been one, anthrax was one back in 2001. FINRA is always coming up with something to, and rightfully, to warn investors about, and marijuana's turn came up. I think their timing was really poor. The market actually pretty much bottomed right about the same time as FINRA warned that first time in August of 2013. And then as the year began 2014, the stocks in general went up seven-fold. Hard to believe, I've never seen anything like it in my life. So when that happened FINRA... I sure say to myself, "We really better warn them now." And they put out another warning, and I, 100%, support what they were doing even though their timing wasn't so great the first time, but it didn't matter after their warning... well, they weren't up seven-fold yet as they were climbing, but it didn't matter, after that warning stocks kept climbing.

It wasn't until the SEC came in, it was early March, and the first time they suspended the company, I'll explain that in just a minute, but it wasn't really one that people followed too much and same with the second one. I believe it was the third one which was about March 25th, if I recall, was a really solid company in a kind of... that happened right after the market had peaked. And then the fourth one was one of the... I'll say it again, it was one of my favorite companies. Nobody that I'm aware of can fully explain what happened, but that company was called Grow Life, or it still is called Grow Life, simple PHOT, and that really set the tone.

In over the next few months the SEC suspended a bunch of companies. Most of them probably deserved to be suspended. I'd still say that the two that I just mentioned, one of them was a very technical thing, it had nothing to do with the company and then Grow Life very unclear why that happened. So a suspension doesn't sound like the worst thing in the world. What it entails is two weeks of not being able to trade. The problem is when you come back, you go to what's called the gray market, which is basically purgatory. Very few stocks emerged from the gray market.

Remember earlier in this conversation, your prior question, you asked about the OTC and the risks and all that. Well, the gray market is worse even than the penny stocks, the pink sheets and the other OTC levels because the liquidity dries up. You can't get a quotation, you have to trade old school. You got to call up your broker, give him a phone order, there's no electronic trading, there's no money market makers making bids and offers so it gets very difficult to trade. And as I said when I answered your question, these companies required capital. So it's very difficult for company trading on the gray sheets to get people to lend them money or to buy their stock through private market.

So long story short, the SEC... there were some people... I might have been one of them, I'm not going to say, who thought that they were trying to cool the market, it make sense that they were quite frankly. I think that there are a lot of bad actors in the space. The SEC ended up suspending, I think, 14 if I'm not mistaken, it's been so long I kind of haven't been focused on them recently. The last one was a obscure company based in Canada but incorporated in Nevada, and then before that some really bad companies, that everybody knew that were bad, that goes back to June 6. So truly been awhile since this has been a hot issue but it certainly one of the big issues of the year and one of the reasons why the market finally broke after going up seven-fold.

Matthew: So you kind of the antithesis of the pump-and-dump shops in Wall Street, so for people who aren't familiar this is how it works, I think and correct me if I'm wrong, is that these pump-and-dump shops get everybody all excited over these penny stocks that maybe they bought at a super low price, and then once everybody's nice and excited as very frothy they dump it. And if you bought those stocks you're left holding the bag and they're generally not good stocks.

Alan: That's very accurate.

Matthew: Okay.

Alan: Yeah, my business model is very different. My full source of income is... well, okay, I'm a blogger in Seeking Alpha, I've been blogging there for almost eight years. That's a small part of my income, very, very small now, The vast, vast, vast majority of my income is exclusively from my subscribers. I don't invest in any of these stocks. Sometimes I get some criticism for that like... because I understand the point. People say they like the chef to eat his own cooking. I do get that point but I've really tried to structure myself, my business I should say, to be as transparent and conflict-free as possible. Like you said I'm the opposite of a pump-and-dump. I have no vested interest in any company, I don't get paid by any company. I don't get paid if their stock goes up or goes down. I only get paid if my subscribers continue to subscribe.

Matthew: Sure that makes sense, good motivation there. Switching gears to GW Pharma which has been on the news recently, can you tell us a little bit about that company and also a little bit about synthetics in general?

Alan: Sure. GW Pharma stands out, as I mentioned, almost all the companies in the cannabis space are penny stocks, but GW Pharma is not a penny stock. They trade on the NASDAQ. Their primary listing is in the U.K. The company's been added since 1998 and it has been public since 2001. They did something very smart, I'll tell you more about the company in a second, but just so your listeners understand, they listed on the NASDAQ in May of 2013. It was without fanfare quite frankly. The stock didn't do anything for months but then it took off. That NASDAQ IPO it was... they actually sold shares in IPO and I believe it was a little bit under $9. It peaked earlier this year at 111.46 on July 1st, and today it traded below 60, it's the lowest it's traded for quite some time. To answer your question, GW Pharma is 100% focused on cannabinoids science. They work with the plant, not synthetic, which we'll talk about in a second. Their lead drug is Sativex, that was their first drug approved on, I believe, 27 different markets but the main market would be the United States and they're in clinical trials here.

Two different indications the first one it's going for is against cancer pain and the second one would be for treating one of the side effects of multiple sclerosis called spasticity. That's what they got the approval for in those other countries, but advance cancer pain they decided would be an easier approval in the United States. Of course, to get approval in the United States they have one issue that has to be resolved which would be right now, cannabis is Schedule One, which means the government thinks it provides no medicinal value whatsoever. So that has to be resolved. Their main drug is called Epidiolex and this is a game-changer.

I like the story a lot before and I'm not going to mention any other things but they also have candidates for schizophrenia, ulcerative colitis - I don't want to miss some big one - glioma which is a brain cancer, and I think there's one other one that they're working on but the main one is the drug they call Epidiolex which is for rare childhood epilepsy. That's a very large market and it's not treated very well. The drugs are highly toxic, terrible side effects, and these children... that's a very easy identified target market. I mean, these kids need help, they're having these uncontrolled seizures, so very, very poor quality of life as it happens. Epidiolex actually has little to no THC in it. It's mainly cannabidiol which kind of gets to your next question.

Before I talk about cannabidiol and synthetic, I just want to say that GW Pharma is a great company, it's a biotech. One of the things I look for in a biotech would be, you want to make sure they're not a one-trick pony. While the company is a hundred percent focused on cannabis, they have multiple drug development programs, lots of intellectual property, like I said, they've been active since 1998, clearly a great company. But who knows what the value is? If Epidiolex succeeds, the value is a lot higher. If it fails I don't if the rest of the pipeline will justify the current valuation which is sixty or so dollars, works out to be about 1.2 billion, a little bit over $1.2 billion.

So very interesting and one last point before I go to the synthetics, is they have partnerships with leading pharmaceutical companies around the world for Sativex. I mean, so very interesting story. Now I think what's been going on with the stock recently, I've been talking about this for quite some time but there's a risk that the FDA will not approve their drug or the DOLE approves an alternative. One of the alternatives would be synthetic cannabidiol or CBD. That's the primary ingredient that's in Epidiolex. So synthetic just means it's manufactured and it's not coming from cannabises, it's chemically-derived.

There are no clinical trials even underway yet, but there's a company that was able to get what's called orphan designation from the FDA. Even though GW is ahead in the lab there's always a chance that this company INSY, I-N-S-Y, is able to leapfrog them and there's always this underlying risk because, let's face it, the FDA would much rather approve a synthetic drug that's standardized, the same vile would always be the same no matter what, and not have to reschedule even if [inaudible 17:39:00]. This is definitely a risk. I think that may be weighing on the company, it's been a real momentum stock and it's hard to tell what's going on. It could just be, just in general, market softness and the fact that stocks had such a run up and people are now locking on one-year long-term capital gains on the stocks as well.

Alan: That makes sense. What stocks are you most excited about, your maybe top two or three that you're sure.

Matthew: Sure. Well, I have to tell you so the market has given up almost 100% of the year-to-date gains. The low last year I've an index, my partners and I have an index that we monitor just to put things into context, that index began at 100 at the end of 2012, 12/31/12. It traded as high as I think 240 last February 2013, bottomed at about 70, ended the year at 159, had a little run up at the end of the year. So right now it's in the 170, so we're still up a little bit year-to-date. I just want to... I like to lay that out because first of all, things are very volatile.

Second of all, the ups and downs we're kind of in a down cycle right now but it's hard to tell. Like I said it bottomed at 70 last year. We bought it from 10/10 it was a high this year to about 175 or so as we're speaking right now. So I do like GW. I think that's one of my favorite names. There are no companies in the world like it. Now that doesn't mean we're going to make money with it. I like it at lower prices as well, but now with the pull back, almost at 50% pull from the peak, I think it's interesting again. We spent a lot of time talking about that but that would be one of the ones that I find most interesting.

Another company that I like is called the mCig, they're based in Bellevue, Washington. They started off doing a $10 vape pen. For a traditional marijuana consumers, the vape pen is a head scratcher because it's like, "What's the point?" but there's actually the whole trend towards vaping in general has a lot of support behind it, health reasons one of them. Another just being it's less wasteful. If you buy cannabis and you smoke it, you're burning a lot that you're not using. So it's a lot more efficient to vape. mCig started off as a $10 vape pen, very simple almost a disposable if you think about it.

Since then they've done a lot and I'm not going to go in all the details but they have a separate subsidiary called Vitasic. They've raised the price but the $5 disposable vitamin-enriched vape pens, they have nothing to do with cannibis. There's actually a lot of signs out there that smoking on a vape pen, or smoking's not the right word, inhaling on a vape pen can help you quit smoking, with no nicotine neither. So that's one of the interesting place, plus people think they're cool, I don't know, I'm 50 years old, it's not cool to me but I see the Leo's out there using them so it's obviously cool.

Matthew: Right, right. Yeah, the movie star, right?

Alan: Yeah, exactly, but then the third thing that they have they bought a tabletop. They didn't pay very much for it either but they bought a tabletop, vaporizer and so the whole trend towards vaporization, I'd say the negative is it's a little bit commoditized. But I like mCig for a lot of reasons. On the product front I feel like they have the low-end covered very well. Nobody has been as successful as them at penetrating the low-end, creating a brand with the mCig. And then they also have the high-end covered and I think that overtime they'll continue to fill in their products. Second of all, the company is debt-free, very unheard of among these penny stocks. The guy, the CEO, the guy behind it has shown himself to be very shareholder friendly.

Now the knock against the company continues to be it's expensive. At the current price of about twenty cents per share, which is way down from the peak at 90 or so since, it still has the way I calculate it, about a hundred million market cap. This is a huge multiple to the revenue. So that's kind of the... I don't think it's unique in the space unfortunately. Most of these companies... most companies on the OTC for that matter, valuations usually quite challenging to say the least. I'd like to think this company can grow into this valuation but I'd say that's the biggest risk. I throw out one more and that is, I want to talk more about the topic of Canadian medical marijuana but...

Matthew: Sure.

Alan: ... there are now five publicly traded companies there. The one that I like the best is called Bedrocan. Bedrocan has been the monopoly supplier. I need to be careful, it's called Bedrocan cannibis. They're affiliate, I guess it's the right way to say it, Bedrocan NV which does own a stake and has a supply agreement, is also transferring IP, things like that. They are the monopoly provider in the Netherlands. The company has been around for quite some time. They know how to grow cannabis, they know how to deal with government antitheism. We can talk more about Canada later but the point I want to make about Bedrocan is their strategy, I think, is brilliant but it kind of looks... I guess the short-term investors they don't quite understand it and that is they started off in this Canadian legal system importing. They are importing so that their profits aren't going to be very high at first because they have to pay to import it.

At any rate, there's only 13 licensed producers in Canada so far. Five of them are publicly trading and Bedrocan has among the highest in terms of patients and reported revenue. But things are just getting started in Canada. Long story short, I think the valuation on Bedrocan is the best among the Canadian license producers and I think of all the companies I've looked at that's the easiest one for me to get my hands around the valuation. Depending on how you look at it, but fully diluted, assuming all the warrants that are right now above the current price were to get exercisers 90 million shares, Canadian stock trading at 66, so that's 16 million Canadian market cap in the United States, obviously a little bit lower than that because 88 and a half percent right now about so...

Matthew: Is there a ticker symbol for that you could share?

Alan: Yeah, so in Canada, that's were trades are very liquidly, it's B-E-D. There's a convenience ticker in the United States B-N-R-D-F. It's not actually a listed ticker.

Matthew: And for mCig, is there a ticker M-C-I-G or...?

Alan: That's correct.

Matthew: Okay, very good. Where do you see institutions coming into play? I mean, generally they have a fiduciary relationship with the pensioners and they might view OTC stocks as too risky. Is that accurate?

Alan: Oh, yeah. The institutions are nowhere to be found in the United States. I spoke at the socionomics conference in April, it was in Atlanta, that's where their headquartered, and the very thoughtful group mainly high network individuals and institutions were in attending tonight. I addressed this topic and I can tell you I got excited not because I thought that they were about to buy these stocks, that's for sure they're not. But the fact that they're interested. So, Matt, you raised the right point. They're not going to buy OTC stocks right now. They're not going to pay these crazy valuations but they're very interested. I think that they would invest before cannabis becomes legal in the United States that's kind of a question.

So where are the institutional investors who do want to play in the market? Well, they're certainly in GW Pharma, that's very heavily institutionally owned. That's one of the things I like about the Canadian market. Canadian medical marijuana is federally legal there. Tweed was the first company, there's some others, TWD on the TSX Venture. I mentioned that there's five companies now that are trading publicly in Canada. Tweed was the first, they all trade on a TSX Venture. The regulatory requirements there are much higher than our penny stock markets. They don't have the primary listings there but the kind of junior listings are well above the pink sheets in the United States for instance.

And institutions in Canada are definitely investing. I don't have really strong evidence of major positions by companies, institutional investors in the United States, but I've identified several institutions that do have holdings in these Canadian license producers.

Matthew: Sure, makes sense. Let's talk a little bit about Warren Buffett, the most famous investor in history maybe, arguably. He talks about how when he's evaluating companies or stocks, he looks for durable competitive advantage or he often calls it a moat, and that is a barrier to entry for competitors to come in and steal the profit margin by just duplicating what this company or that company is doing. You could see it with one of his favorite investments - Coca Cola, and they have a trade secret in their formula and their brand. He also recently bought Heinz ketchup, which their trade secret or their formula. So they have these durable competitive advantages. What companies out there in the cannabis space do you see that have a true durable competitive advantage or at least the beginning as one?

Alan: It's funny you mentioned Warren Buffett because there was something going around the internet, it's true actually, not everything on the internet is true. Warren Buffett-owned company actually is a cannabis play. It's neither we're talking about. I doubt Warren Buffett even knows about this but...

Matthew: Is this Cubic? Cubic...

Alan: Yeah, yeah, yeah, yeah you got it. I don't know if that triggered your question or not, that's not. That does not have a moat in it. It's interesting because I'm actually... one of the companies... one of my patent portfolios they... I don't know if I should say that, but let's say their product would work with the Warren Buffett companies' product. This company that I'm talking about sells, no moat around this, Matt, but they sell reconditioned cargo containers. They're retrofitted to service like miniature growth facilities, self-contained growth facilities. And that the Warren Buffett company Cubic or whatever it is,, basically makes scaffolding that goes around it so that you can stack these things. But to answer your question, this is obviously important. Investors on the space need to understand it's federally illegal right now, okay, federally illegal.

So what this means is there is not going to be a Coca Cola or a Heinz right now. In general, the market is going to be fragmented. It's going to be populated by smaller companies that operate regionally for the most part. When it comes to brands, there are several that are attempting to be a national brand, none of them are in a public market yet. I think that investors will like that and you could get some sort of moat but the moat is probably not going to be a secret ingredient, quite frankly. It'll just going to be in the brand. There are some things that take place in the industry. Again, for the most part, these are not in publicly traded companies, but there's certain types of software that enable regulatory compliance. You can imagine that being... if you built the best mouse trap and becoming industry standard, that would give you a thing, but then again that's not in a public domain right now.

There are companies with proprietary growth technology, some of those are in the public space but I don't think they're proof enough and I don't want anyone to share this symbol. I think that's everybody's goal. We have a huge industry right now that already exists. It's not like this is a brand new industry. Size of markets in the many, many billions, low-end I hear 60 billion, high-end 150 billion. The growth opportunity is what happens is this illegal industry transitions to legal. And I think big picture one of the things investors need to be aware of is you need to have regulatory compliance. And so I mentioned already the software that helps you do that when it obviously be important. Quality of product has never really been... or cost of production, neither of those things have ever really been the key determinants to success in the marijuana space. It's really avoiding getting caught for the most part. So you've had... your suppliers haven't needed to focus on lowering their cost of production so much.

Any sort of process that can improve quality, lower cost of production, this has the potential to create that moat that you're talking about, I don't really see it. Now, if I really answer your question the best I can, I would will tell you that GW Pharma has as close to a moat as you can. It's very interesting, they have a huge patent portfolio. We can't patent a cannabis, you can't even patent strains but they have some patents on technology around it. I think that, on top of the huge investment that they've made in R&D over the last... what is it now, 17 years, 16 years, that in an essence creates a moat. There'll be a lot of companies, I'd like to say, were the next GW Pharma and I would say, "Yeah, right. No." So I would say that's one. And then what else makes a moat? A moat can be created by the government, quite frankly. If you hear it in the... well, all across the country.

I know we have deregulated power now, but the utilities, they are protected by the government in the same way in certain states, at least for now, licenses are being limited. Now, there are no public company ways to take advantage of this but if you're private investor you might consider trying to get a license in Massachusetts, it could be very lucrative. They're limiting the number of licensees. Now, Canada, which I think is one of the most interesting opportunities for cannabis investors right now, has an unlimited number of producers theoretically. So far 13 have been approved, it's been a long time since they've made a new approval. In fact, they took one away. There were 14 now there's 13. On the one hand, the moat is not there because the government theoretically has unlimited number of licenses available, but on the other hand, the barriers to entry are so big. Even if you get that license to actually successfully offering that system is going to be huge. So I think overtime the Canadian market may fall into that type of moot type of opportunity.

Matthew: That makes sense. Now talking a little bit about Schedule One, and that's a great point to keep on emphasizing this, cannabis is still federally illegal which is a huge impetus to a lot of the stocks in the industry moving forward till that gets changed. We've got some big elections coming up here in November. Oregon, Washington DC, Florida has a medical marijuana on the ballot. I mean, obviously there's a trend in play here. Does the trend have enough momentum you think to get a change at the federal level from moving cannabis from Schedule One to something else less severe?

Alan: So this election season is interesting, it's a midterm election and not the four-year national election. You mentioned all of them. On the legalization front, I think DC is the least interesting to me because if they're not talking about a ROPE program there. They're really... it's what I would call extended decriminalization. I'm for decriminalization but what you really want to see is legal production as well as legal consumption. That's the case in Alaska and Oregon. And I would just point Alaska is a small country and it's not contiguous, so probably not as relevant. But Oregon is contiguous to California. We already have Washington and Oregon, you look on the map you see Colorado. All things point to California. That is the hugest market in the country. I do think that that election in Oregon could be pretty interesting.

On the other side of the country, Florida at the Burroughs High, they need 60% of the voters to pass, but if they do so, they'll have medical marijuana creating the first program in the South. The South is not known for being progressive so I'm really rooting for this. I think it's a game changer for the national perspective, let's call it. I'm here in Texas by the way, your listeners may not know that, we're thought to be one of the least likely to get medical marijuana but I'm kind of encouraged. I'm aware of what's going on here on the ground. I think a victory by the voters in Florida would help here in Texas where the voters have no say, it's really the legislature but that's a different story. But all this doesn't really change the big picture which is, like you said, cannabis remains federally illegal and that's not necessarily a bad thing for investors, by the way.

It allows opportunity for the next several years until federal legality is established. My own estimate, and it's consistent with many others in the industry, would be that, maybe at the end of the next President's election it could happen. That's... you know, we're talking about 2020 basically, 2019 maybe. But I'm not so sure that it will. Government has been fighting a losing battle for a long time. It's not like when you get the majority the states of medical marijuana, the states are going to have some sort of States Right issue and make it federally national, that's not the way it's going to work. The stigma needs to be eroded and proof of success needs to be shown. I think Colorado has been a great example on the legal front. Washington the switch just turned in July so it's really too early to tell, but hopefully that one works out as well as Colorado or close. To answer your question, I don't think that the tide is turned yet.

Matthew: Okay. Looking out at the landscape of cannabis executives out there and all the different companies, are there any that stand out, that really have the Midas touch or seem to be able to execute in the way that others can't?

Alan: Yeah, you know that's a funny question because one of the things about the OTC, it's not the A-Team or even the B-Team typically. You got a temper that responds with the bars of very low. I've been doing this now for almost two years and two people have really stood out to me. The first I kind of talked about him earlier, I'll name him by name now but the CEO of mCig, his name is Paul Rosenberg. He has done a very good job, I think, of being shareholder friendly. Like I said, the company has no debt which is rare for the OTC space in general, and certainly for the marijuana stocks it inhabited. Second, he has shown a lack of willingness. Lack of willingness? I'm not saying that right. He has shown a resolved, that's the way I want to say it. A resolved not to dilute his shareholders. Since day one there's not a single share beyond what was outstanding that day.

So this is a great start. He's kept it simple, he's kept his messages very focused, he's done a good job of updating shareholders. Yes, he has his surprises but they're usually positive not negative. He's done some interesting deals and he's been willing to dilute himself. So rather than charge the shareholders for that vapolution acquisition that I mentioned, the tabletop vaporizer, he just used his own shares. I think that's a smart strategy because, let's face it, as I said earlier, the stock's expensive. So how do you create value? You take your expensive stock and you turn it in to something that can produce value overtime. That's kind of his philosophy, and the good thing for shareholders is he's been willing to do that out of his own pocket at least for now.

The second person that's really impressing me is a guy by the name of Derek Peterson, he's a CEO of a company called Terra Tech, T-R-T-C. I talked to a lot of people in the industry and Derek's name is always highly regarded. I asked people for feedback on him, I've introduced him to people, deals sometimes follow these introductions, I always get positive feedback. He has unique experience, he has kind of a Wall Street type of background, but also cannabis, he's separate from Terra Tech. He is one of the principals in the Bloom dispensary in Oakland, California. What I look for in these companies are executives who understand Wall Street and common modern business practices, let's call it, and also people who have some roots in the cannabis space. He seems to offer a lot of balance there. So those are two that have stood out for me.

Matthew: That's great. I'd love to get them on the show some time. You speak really highly of them.

Alan: You won't get Paul Rosenberg, he's very averse to publicity. Derek, on the other hand, has been featured all sorts of places. I can set that up for you probably pretty easily.

Matthew: Oh, great.

Alan: Two polar opposites when it comes to media.

Matthew: Okay. Now a technical question, there's a lot of listeners that won't be familiar with what technical analysis is. Can you give a little background on what that is and if you use it, how you use it?

Alan: Sure. I think one of my philosophies in life is... well, I think you can borrow from a lot of different things, there's no single path. There are people in the investment industry that can tell you everything about a company. They can tell you the birthday of the CEO, what date all the filings have come up the last year, whatever. But they know the company like at the back of their hand, but they couldn't tell you the stock price if their life depended on it. Then you have other people... and that by the way is a fundamental analyst. They're paid to look at the company and do research on the facts about the company and their operations and their valuation too.

Then on the other side you have technical analysis, that's basically looking at charts and volume and prices things like this, sentiment indicators, whatever the tools are, but if you were to ask the successful ones there what they do, and then you said, "Well, what does this company actually do?" They would like, "I don't know, I don't care." So these are two kind of extremes. I think in the middle strategy that uses both fundamental and technical analysis overtime is going to serve people well. So I think in the OTC space, which is where the vast majority of these marijuana stocks are, technicals are very important. You have a lot of volatility, so that's a tool that I find helpful. Now these are just tools. They're not magic eight balls that work. Magic eight ball doesn't work obviously but...

Matthew: It does for me.

Alan: Yeah, I tried to use both of them actually and I do think... you get these people say, "No, fundamental analysis is the only way." Or, "Technical analysis tastes great less filling." I don't think so and I think on the OTC space specially it's very important to pay attention to technicals. There's a lot of shenanigans going in, these things can be faded out with technicals in my view.

Matthew: Now there's no derivatives for OTC stocks, is that correct?

Alan: That is correct.

Matthew: So if an investor wanted to buy a pall color or puture, engage in some sort of options strategy like a color butterfly, all these things don't exist for OTC market...

Alan: Correct. In our space, like on our site, actually I have a gentleman who works with me and one of the things he focuses on is sharing his ideas on GW Pharma options but that's not OTC.

Matthew: Okay.

Alan: And that's a very volatile stocks so selling... puts some calls can be a liquid strategy.

Matthew: Sure. Supposed there's a lister out there that wants to start, to put his or her toe in the water with marijuana stocks. I mean, my key takeaway today is that this is very risky and there's so many charlatans out there, it really takes somebody that's spending a lot of time on it like you to navigate this choppy waters and find the few that are worth looking at. That being said, someone that's maybe got some background with stocks and bonds and some real estates, where does marijuana stocks fit in to the portfolio?

Alan: Sure. There's a nice way and a not so nice way to describe it. Irked some of my subscribers by using a term, so I'm going to use the nice one first. Think of it as like venture capital. These are very speculative startup companies, development stage for the most part, not the cream-of-the-crop quite frankly, unfortunately. The marijuana industry is pretty big. Even the legal marijuana industry is gaining size, but most of the industry is not represented by this public companies. You can invest privately in companies, and I actually have a service that hopes with that, Comfort 20 Funders, but you know there's risk on investing privately, liquidity being the huge one.

But if you're looking into public market, think of it as like investing in a public venture capital type of endeavor. The Pejorda [SP] term I use is lottery ticket, and I don't mean it as badly as it sounds. But in a lot of ways that's what this market is. I mentioned there's over 200 names of report to be cannabis companies. I have a focus list much lower than that about 32 names, but even on that list I don't think a lot of those companies are going to make it. I always tell when people ask me, I say 90% of the companies aren't going to make it and a lot of those because they're just crooks quite frankly. So, yeah, I've hired private detectives to help me, that's usually not in the resources of individual investor so...

Matthew: I like it.

Alan: Yeah, so what do you do? So to answer your question, if you're going to participate in the industry, try to find a few companies that you actually think are legitimate. Like I said, I found maybe a dozen or so, that's the first. And second, realize that your chances of playing that are not great. We're very early. So what does that mean to you as an investor? Don't put all your eggs into this basket and diversify within the basket. Pretty common type of stuff, but these are very important lessons in this space because they're very volatile, and my favorite company, I told you one of my favorite is mCig, started the year at nine cents went to 90 cents and it's back to 20 cents. It's having a good year, it's up a hundred percent. But it's not having a good year for anybody that bought it after the year began, quite frankly. Even me I thought it looked okay and say it's 30 cents a couple of weeks ago and now it's a 20. So don't put all your eggs in the basket so that you can afford these draw downs because they happen.

Matthew: Sure, and when you do get a winner it sounds like it could be a hundred percent multiplication on the value so I mean...

Alan: Sometimes in two days. Thanks, Matt, because I wanted to make the point also, don't be an investor in the space. It's ironic because I call them service optimistically 420 Investors, maybe 420 Trader would've been better. It's just not a buy and hold market and I think people are kicking themselves for not selling after these big runs. I have these mono portfolios and sometimes the stock will go up a lot and I sell some. And people are like, "Why? Why are you doing that? You're crushing it. Why are you...? You're a rally killer." You just have to get interested with volatility. If you want to be able to buy one when it's getting crushed you've got to sell when it's going up and I guess that's the second piece I would say. Treat them like lottery tickets but cash them in when you win.

Matthew: Makes a lot of sense. Alan, as we close, can you let people know how they find you online?

Alan: Sure. So I love social media now. It was never my thing but what a great way to connect. I have several different ways. First of all, my website is the easiest to remember, it's 420investor.com. And if you go there and you've never been there before you'll have to... well, I don't think you have to register but if you do register then you'll be able to go further into it. So 420investor.com, but I can be found on Facebook, it's Facebook.com/420investor. And I have... I post things there very regularly. If you don't want to be a subscriber to community that's a good way to stay on top of big things that are going on because I do post there. I'm on Twitter, my handle there is @invest420. I'm also on LinkedIn, I run a group there called Cannabis Investors and Entrepreneurs. You can connect with me directly or go straight to that group. And, finally, each trading day, I publish something called TheDailyDab.com. I will email it to you if you register on my website, but if you just want to go to that website, it's free and you can get an update every single day.

Matthew: Great. Well, thanks so much again, Alan. This is a great interview. I really appreciate your time.

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