Cannabis Stocks are Taking Off – Interview with Alan Brochstein CFA

alan brochstein cannabis stocks taking of

Alan Brochstein covers the cannabis investing space through his subscription membership site 420 Investor and through his investing news site New Cannabis Ventures.

In this wide-ranging interview, Alan and Matthew Kind discuss some of the most noteworthy IPOs in the cannabis space, how the US and Canada public markets differ, and how the cannabis stock landscape has changed and is changing.

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Cannabis stocks are a hot topic, particularly in Canada, but now also on U.S. exchanges with the IPO of Tilray. Here to tell us about cannabis stock investment is returning guest, Alan Brochstein of 420 Investor. Alan is a chartered financial analyst and a contributor to "Seeking Alpha". Alan, welcome back to CannaInsider.

Alan: Hey, it's great to be back. Always good to talk to you.

Matthew: Give us a sense of geography. Where are you in the world today?

Alan: I am smacked dab in the middle of Houston, Texas.

Matthew: All right. And I'm in Edinburgh, Scotland.

Alan: Nice.

Matthew: So, you've been on the show a few times over the years, and you shared a lot about cannabis investing. But how has cannabis stock investing changed since the first time you were on four years ago? And then you were on kind of a couple years ago, and now you're here again, it seems like it's really exploded recently. But what's kind of your 20,000-foot view to kind of give people a sense of where we were and where are we now?

Alan: Wow. So, four years ago I was the sheriff of the Wild West, Matt, and it know, I was very hesitant to tell anybody they should invest. It was really a dangerous environment, all the stocks, you know, weren't that many, were on the OTC. And then, you know, that was a problem in and of itself, but it was also just the real cannabis industry wasn't reflected in the publicly traded market at that time.

And even a couple years ago, there were some things going on that were interesting, and I was one of the early adopters of a bullish thesis on Canada, and we probably talked about that a couple years ago because in October of '15 is when Justin Trudeau was elected. So if it was any time after that, that thesis became very prominent. But I have to say, and is not just exactly recently, I can walk you through kind of when things really changed. But as we sit today, it is radically different. But let's go back just a little bit.

So, I can recall speaking at the Houston CFA Society in April a year ago. So, you know, about...what would that be? About 16 months ago. And I told them, I said, "I never would have dreamed of standing up here and speaking to this audience, really until very recently." And I think what was going on in my mind at that time was, everybody was aware of the bullish thesis in Canada, but finally the dollars were showing up, and there were these very large capital raises that started taking place in early 2017 in Canada. And I told my audience at the Houston CFA Society, that this was a global industry, that there were a lot of different things that were going to unfold, but to keep their eyes on Canada because that was really the center of the action.

And so if you fast-forward from that presentation which was in late April just six months, we have what I think has probably been the most important event in terms of the development of the global cannabis industry. And that was the cross-border, cross-industry investment made by Constellation Brands into Canopy Growth. And that really lit a fire under the investors, and... So we've seen a lot happen since then. And, you know, it goes much deeper than that, but I think that was the big change. And we can talk more about how things have changed, but the difference is we are now seeing the U.S. cannabis industry finally benefiting from all this capital raising.

Matthew: So Constellation Brands is a huge alcohol conglomerate that...I can't remember their flagship brand. I think it's Corona maybe, but...

Alan: That's one of them, yeah. They have many...

Matthew: Yeah, they have others, but yeah, they're huge. And so they...

Alan: Wine, beer, yeah...

Matthew: They invested in one of the Canadian cannabis companies, and that turned out to be a great investment. It didn't...

Alan: Yeah, it did turn out to be a great investment, but I don't think they were looking at it as just a near-term financial investment. I mean, it's really about... So, if you think about who are really the industries that could be impacted by the positive developments of the cannabis space, two of them really come to mind. And that's the pharmaceutical industry and then the alcohol industry. These are pure substitutions. Some people would throw the tobacco industry in there, and I don't really think that the tobacco's not a substitution thing.

I think that's more of like, this is really a crappy industry where there are some parallels, and maybe they can get into the industry. It's not the exact same thing. And so I think for Constellation Brands, who had announced a whole year earlier that they were looking at the space, it was a very thoughtful process where they really decided to go with what they perceive to be the best of breed. And it was a deal that was structured not just as an investment, but as a strategic alliance to develop a product that doesn't yet exist.

Matthew: That's pretty crazy. Okay. It's hard for people...the landscape is so different because in Canada it's these massive, massive companies, the LPs, and in the U.S. everything is totally the opposite where it's fragmented. So it's kind of hard for people to get their mind around, and it's also federally legal in Canada. You can raise capital, have a bank account, so it's different in all these ways. But you were saying that the U.S. is starting to get some benefit on that. I wanna go into that in a little more detail later. But talk a little bit if you would about mergers and acquisitions and what we're seeing there and what your general sense of that is.

Alan: This has been a big theme as well, consolidation. And in Canada today there are... Actually yesterday it was at 40, today it's 41 companies that are trading publicly, that are either licensed producers, and that's all they do, or they're a holding company that has majority know, that... Basically, there's 2 companies that are holding companies, and 39 that are just LPs. But even some of those LPs are looking more like holding companies.

In any event, that's a lot of public companies for a country of 38 million, you know, with a nascent cannabis industry for consumers and kind of a maturing one for medical. And so my thesis a long time ago was that they would give out too many licenses, and there would would be really difficult for many of the smaller companies to even survive. And so the way it's played out, Canopy Growth was the first consolidator, and they bought Bedrocan Cannabis in late 2015, and that know, it was a big deal at the time. Now you wouldn't think of it as a big deal in terms of market cap, and it was a deal that ultimately didn't really work.

Then Canopy came back and bought Mettrum at the beginning of 2017, but it was really... And when my thesis really took off was after that Constellation deal. Because, you know, what were the other large players going to do, now that Canopy had this big cash infusion and strategic partnership? So the thinking was that there'd be consolidation within the industry, consolidation of more cross-border, cross-industry type of things, and yes, that's been the answer. And there's also now some of these smaller companies are partnering, and there have been two recent examples of that where two smaller publicly traded companies that don't really have substantial sales yet used excess cash that had been raised through equity sales to purchase...and they also used stock. But to purchase private LPs of a similar size actually.

So, we've seen Aurora Cannabis, which is now actually the largest in terms of sales, do a consolidation in the industry where they bought essentially what was number three and number four behind them. So, two, three, and four all merged, and so now bigger than number one. It's really fascinating. And we also saw, Matt,'s not a very well-known company, but it's a global tobacco player called Alliance One International, buy control of a smaller licensed producer in Canada, and then...I'm trying to think. There's probably been some more. But I think you get the picture, there's a lot of consolidation.

In the United States, it's crazy. Because like you said earlier, I'm gonna disagree with something you said about there not being huge companies. There are some huge companies. Huge. But I think where you're 100% correct is because of the fragmentation, they're not able to scale necessarily the way a Canadian company might from one facility. So, you basically have these holding companies in United States that are very large, and, you know, one of them recently...Acreage Holdings, and it's a small world category.

I've known their CEO for more than half of my life. It's kind of funny. I went on a trip with him to Myrtle Beach 30 years ago or something. So, it's really funny the way sometimes your paths can cross in life. But Acreage has operations in I think now 13 states. And they raised...they've never revealed their financials publicly, but this part is public. They just raised $119 million as a private company. That's not what they're valued at, that's how much they raised, $119 million. I say it's crazy, it's really not crazy. But when you and I were talking four years ago about this, I never would have imagined, right? So, it's major leagues now.

Matthew: It is major leagues. Which brings us to Tilray. Can you talk about that a little bit?

Alan: Yeah, sure. So, for those in your audience that aren't familiar, Tilray is one of the largest LPs, and it was private. I think most people knew it was a large LP. And that was confirmed when the documents came out, and in fact, I think it's...I wanna say $7 million-a-quarter run rate. It puts them I think at number four right now. And Tilray was 100% owned by Privateer until they sold some outside equity in it earlier this year. And the company has had a very scientific approach. They checked a lot of the boxes in terms of they're international, they have a high amount of their sales in extracts rather than flower.

And the other box that they checked was that they had different geographical and types of production. So, they had their flagship out in British Columbia that's an indoor facility, and then they also have an Ontario greenhouse that's in development. So really a well-positioned company that's been operating for a long time. I mean, they did something...I think it was kind of smart. It's definitely interesting. And that is, rather than list in Canada, they decided to go straight to the NASDAQ, and not even list in Canada. Which is really kind of odd.

We have seen the leading companies, and we're gonna see more of this in Canada go from the... Look, when we were talking about this four years ago, if we talked about it, they were all on the CSE or the TSX Venture, all the companies in Canada. But more recently they have worked...some of them have worked their way up to the Toronto Stock Exchange. But the Toronto Stock Exchange is not's not held as highly as the New York Stock Exchange or the NASDAQ globally.

And so Tilray decided to kind of I think one up everybody by just going to the NASDAQ. And so the IPO was done at a price that I told my subscribers at 420 Investor I thought it was a fair price. Which just goes to tell you I don't know what I'm talking about because it doubled right after. So, I didn't see that coming. But just so everybody understands, the only shares of Tilray that could or that still can trade, are the IPO shares. So is a very small amount of the total number of shares outstanding for the company. So, you know, it's artificial, in my opinion. And so there was a lot of interest. And so I say it was smart because, you know, I think it helped them to get a lot of...a lot wider audience actually.

Matthew: So you think there's a bit of a prestige premium going right to one of the bigger exchanges because there's more liquidity in international exposure perhaps?

Alan: Yeah. Well, just to be real clear, yes, what you just said. But really what I'm getting at is, I think that... Look, there's lot of investors in the United States that have been either blind to this whole cannabis theme, or maybe burned by it in the past and burned by the OTC scams and what have you. But probably a larger pool is really just waking up to this. And so the fact that it trades on the NASDAQ for traders is just awesome. You get like pre-market trading, after-hours trading, all the stuff. So traders like it, investors like it because, like you said, it is prestigious.

So, I think what happened was that they really got an expanded audience. I mean, at this point in time the only companies that trade on the NASDAQ and the New York Stock Exchange that are competitors of Tilray, are Canopy Growth and Cronos Group. There will be more very shortly, but that's it for right now. And so I think you can look at how Cronos performed when it moved to its additional listing on the NASDAQ, they were the first, and then you can look at Canopy Growth, how it performed when they moved their listing or...they didn't move it, I'm sorry. When they added the New York Stock Exchange listing, you know, people saw gains. And so there's a little bit of a pattern there. So, I think people were really excited that this opportunity was there, and it's a scarce...but it's just three companies, it's pretty scarce still.

Matthew: Let's talk about valuations because that's on everybody's mind. Are they reasonable in general? How are they different in Canada? What are your general thoughts about valuations?

Alan: Well, first I should say I'm smart enough to be able to say a valuation is high or not, I'm not smart enough to say what that means for the stock. For instance, Amazon I've always thought was a high valuation. I think most CFAs would have agreed with that, but it just goes up. And I have a lot of examples like that. So, I always caution people, be aware of valuation. It matters more when the stock is going down, than when it's going up.

So, I think number one, I've been saying this for a long time, that if you just take like a dollar of revenue generated or even expected to be generated, depending on how you're looking at it, in Canada or United States from the cannabis industry, it's valued a lot more highly in Canada. And so there's a lot of reasons for that. There's more of a global opportunity for Canada, it's not federally illegal. There's another really good reason, and that is, oh yeah, 280E taxation. So, there's some issues that suggest that it should be higher.

But what I was saying for a long time was it's just way too much higher. You could look at companies generating more revenue, and they're trading at a tiny fraction of the valuation of the Canadians. But these things can persist for a long time until they stop persisting. And just the way investors work, they wanna see signs that that valuation gap is starting to close.

And back in April when Donald Trump and Cory Gardner, President Trump and Senator Gardner came to an apparent agreement, you know, we haven't seen it in writing, right? But when that was announced, and when there was some follow-through a couple months later, that really changed everything. And all of a sudden we saw the confidence of investors and operators in the industry just skyrocket. And the confidence, it could be overly optimistic, but I don't...I think it's just probably good enough. If Jeff Sessions isn't gonna win, then we're all gonna win. We don't necessarily have to have all the reforms take place that people are anticipating, we just have to have an environment where they're not gonna make things worse in my opinion.

So, that started a cascading effect of the stocks going up, money coming in, and so we've seen that valuation gap close. There's some really good examples of kind of leading U.S.-focused companies that have seen their share prices go up since April, while the Canadian stock prices, many of them have gone down. So, when investors see that going on, and they feel like they have the technicals behind their back as well as that valuation story, you know, maybe it happens.

Matthew: Well, let's talk about two recent IPOs and kind of compare and contrast them. First, MedMen and then Green Thumb Industries or GTI. What do you think of those two? And how do you think about a high level, and what's important to know there?

Alan: So, this was really the first...these were the first two examples of kind of that post Trump-Gardner and taking advantage of the new optimism. And so we had already seen some of the stocks performing better, and then those guys...GTI was very quiet about it. MedMen everybody knew was going public because they had talked about it publicly. But they both came in about the same time, first MedMen. And, you know, that company has revenue. It's not as substantial as what they tell you they're going to have, which is very substantial, but they do have the revenue.

And it's a very well-known company, they're very promotional, people know who they are. And I think they're smart. They have a flagship in New York, and I think most people say, "Why do you need to have such a fancy store on..." I think it's on 5th Avenue. I forgot exactly where it is. But, you know, very expensive real estate in Manhattan. And it's because it's a marketing tool, for not necessarily just their stock, but for their brand, let's call it. And not necessarily to sell cannabis to people in New York City. At least for now. In the future, yes.

And so that was a very expensive valuation. So you asked about these valuations, but that one was not in line with my comments about the U.S. being much cheaper. That was not, I mean, clearly. The company had a few issues with investors, I think, and they ended up addressing them. The stock didn't perform very well at first, and then it actually moved to a new high price and now it's pulled back. But I personally find it to be expensive still, but I'm optimistic that it can grow into that valuation perhaps. And they definitely are very aggressive, and, you know, that's gonna either benefit them or hurt them. We'll see how that pans out.

GTI on the other hand, I think they rode the coattails of MedMen because MedMen came out with that very aggressive valuation. GTI looked downright reasonable. A lot higher revenue, and a lot lower valuation. A lot. And so just for raw numbers, I think we're talking about two-and-a-half billion in Canada versus one billion. So it's like 40% of the valuation of MedMen, but with higher revenue. And it was kind of interesting. And GTI, out of the Midwest, not as promotional as MedMen. Probably a better business quite frankly, but anyway investors loved that one too, and that one did very well. And it ended up doubling, roughly, and then they sold more stock and then now it's come back down pretty hard.

Matthew: There's a psychology to it there because you want...on the day of your IPO you wanna see a pop, you wanna have there be excitement around it. If it's over-valued, you don't wanna see it go down, so you wanna see it go up. So, it's kind of tricky getting that number right.

Alan: I think. One of the criticisms I've had for several companies that have... And you know, most of these aren't IPOs by the way. And to be real clear, neither of those was true IPOs. An IPO is when you have a company that's never traded publicly. Most of these companies including those two were reverse mergers, is what we call them in United States. They're called RTOs in Canada. But to your point, yes. And I think some companies that have done IPOs, or that have, even Tilray, and it worked for them. But they had just sold stock in a much lower level not that long ago in a private placement before they went public.

And I kind of liked that they did that, Matt, because I think it's smart to sell your stock a little bit cheap. You want your investors to be really happy. They'll be happy to pay a higher price in the future if they've already made some money. And other people will see it and they'll see a nice stock chart. I think one of the worst things a company can do is get really greedy on their pricing, and then their performance as a company may be great but their stock could be going down because they got too greedy. So, it's a good point you raise.

Matthew: Yeah, there is a lot to it. I mean, I feel for the people involved trying to do that and trying to figure it out, like how do you arrive at the perfect price. And I think a reverse merger, maybe that...for people that aren't familiar, can you just talk a little bit more about know, the specifics of what that means, just so people can visualize? People aren't familiar with that term.

Alan: First of all, I have to confess. I didn't know anything about this until I started studying the cannabis space. It's not something that's very common among real companies. It's really something that a lot of fake companies do. But it's been the path for many real companies because like in the United States there's very hard to do a real IPO. There have been a few companies that have done it, but let's see if I can simplify it.

So, a lot of times there's a stock that trades, and there's no business operations. But they have...some people will call it a shell, that may not be the right term to use. As a matter of fact, that can be a very wrong term. So I'm not...I don't get into the intricacies, but just to explain how it works, there's a company that has this stock that's outstanding, and they agree to acquire another company. But it's really the company they're acquiring, it's gonna be the surviving company. That's what a reverse merger is.

And so in the United States, I mean, I can remember Can Labs. They had to give away 50% of their company to get this done. It was one of the stupidest things I've ever seen in the financial world. But in Canada where a lot more of these take place... And that was extreme by the way, that's not even how bad it is usually in the United States. But in Canada, you know, I think it's a lot more reasonable. I've seen deals get done at like 3% to 5%.

And so basically it's a way to fast track going public, as opposed to going through the process of filing a prospectus with the SEC in the United States or with the Ontario Securities Commission or whatever province it might be up in Canada to go public. So, as an know, there's examples of these RTOs working out really well. And everybody should remember, that's how Canopy Growth went public, that's how Aurora went public, it's how Aphria went public. But we have seen some direct IPOs more recently. And I personally think that's a better way, but I think it's more difficult and it takes more time.

Matthew: You know, we're introducing that, what a reverse merger is and talking about that. There are a lot of complications when investing in general, but specifically in the cannabis industry with cannabis stocks, what are some of the mistakes or pitfalls you see new cannabis stock investors make that are avoidable?

Alan: Unfortunately, I keep saying the same thing. I think one of the things I notice is, you know, a lot of people don't know how to read the filings, and that's fine. But you should just be aware. If you don't read the fine print, you get what you deserve. And I think that's point number one, that there's a lot of information in the filings. And I always tell investors, and a lot of people find this surprising, and it's still the case that there are many companies that trade in the United States that don't file with the SEC, yet the OTC markets allows them to the trade. I always caution against that. So that's a mistake that people make, number one.

I think number two, there's this concept that I've noticed, even within my 420 Investor community, that people like the new. Like, if it's new, they like it. And that's what happened with Tilray, in my opinion. And so there's this concept that if it's new, it must be good, and if it's old, it must be bad. And I think that's flawed thinking and the idea... You know, if somebody pays 20 cents for something three months ago, and all of a sudden it's for sale as a public company at $1, you know, you and I would look at that a little bit suspiciously. And I think a lot of people don't really know how to do that, how to evaluate that, Matt.

So, and similar to that, I think a lot of investors take these companies at face value. And one of the things I've noticed recently over the last few months, there's some companies out there and they like to talk a big story, and people like that. Let's face it. Most of the investors in this space are men. I'm not making that up, that is very statistical. Most traders are men anyway. And there's a testosterone thing going on here I think. It's who's got the biggest grow? You know? And I don't think that's the way to invest. Whoever's got the biggest grow, that's not gonna be necessarily the best company. And by the way, it may not turn out to be the biggest grow. So, these are some of the things. There's a lot though.

Matthew: One thing I notice, maybe you could talk about a little bit, is that, well, as you mentioned, people get caught up in narrative. Because I think just as humans we're geared to sitting around the fire and sharing narratives. And narratives have a very powerful place in our society. But also I noticed that there's the excitement level when the cannabis stocks are skyrocketing, is when people start to come in, new, interested people, where I say...

Alan: Oh my gosh, yes, I should have said that.

Matthew: When it's down, when it's like...when you feel like you're gonna puke if you buy a share, like, "I feel disgusted even thinking about buying it," like, that's when I become interested.

Alan: I should have mentioned that too. Look, I run a subscription service, so I'm painfully aware of this. And I actually had...I had to do something that I think it was smart, but some people think it may not be smart, and... I basically stopped my growth because I noticed right to your point that the cycle, that when the news media is all over it and the prices are going up, that's when people want to subscribe to 420 Investor. And when it's down and out, they don't.

And so what I was experiencing in my business was a lot of churn. People would come in, and they'd come in after the prices would go up, and they'd start to buy, even though I wasn't telling them they should buy, and then they lose money, then they get mad at me, and they quit. So, it's all my fault, right? So, I went from monthly to annual subscriptions, which obviously slowed my growth because people don't necessarily wanna pay for a whole year upfront. But then what ended up happening I think was better for everybody. I have less turnover, and then the people, they're not just gonna quit when the prices are down, they're gonna keep getting information for at least a year.

But even beyond my own personal experience, what you say is 100% right. And I get a lot of questions like, "What's going on in Canada? The prices have been dropping and all the news seem so good and they're about to legalize..." I think a lot of retail investors just don't understand the cycle, and they come in at the top. It's just the way it is.

Matthew: Well, maybe they can learn from what we're talking about here. So, I get excited now...

Alan: No, they're not going to. I've been saying this for years. They're not going to. It's human nature.

Matthew: Yeah, I know. But if you can train yourself to, like, I feel sick pressing the "buy" button, that's when it ends up being good.

Alan: That's a good thing.

Matthew: So, talk about ETFs a little bit. Are there any ETFs? Are there any coming? What do you think about them? Would that be a good thing? What do you think about ETFs?

Alan: So, this is a new development since our last conversation, and there are some ETFs. And I was really negative on the first one. It came out in April of 2017, so a little over a year ago. Now, I wasn't negative on the people or anything like that, but I just felt like the structure wasn't so great. And it's tough. So everybody should understand, no ETFs are gonna be able to really invest in like U.S. cannabis operators. Not really. Because of the federal illegality and trying to get a custodian agent and all that, these efforts have been stymied.

So the first one that came out, and it's's massive, and it's done very well in terms of asset gathering, and just the fact that its universe has appreciated in value, so has the fund. And that was Horizon's...or what do they call it now? Marijuana Life Sciences or something like that? But HMMJ, and it was a real IPO, and it traded on the...trades still on the Toronto Stock Exchange, and they've really improved.

And the reason I didn't like it was they had some things in there that were large and I thought kind of deluding the whole concept. They had like a massive position in ScottsMiracle-Gro, which...that's become more of a cannabis stock, but it's still not that much, it's still the wrong kind of grass, not the kind of grass we're talking about. But that was a big one. They had this Insys Therapeutics, which is just a disgusting company, and nothing to do with cannabis but synthetic cannabinoids. And like I said, I just wanna say it again, they're a disgusting company. And, you know, they were caught and just paid $150 million fine for doing illegal activities in their marketing.

You know, so stuff like that was in there. So, that was my main criticism. But now, it really is a much better ETF. I don't have any reservations. And so there have been some other ones. This one was really funny, but it used to be a, oh God, Latin American real estate ETF that failed, so they decided to turn it into a cannabis fund. And they did this weird thing. The same one, this is now's MJ, and I can't remember the name, Harvest, Prime Harvest or something.

This is traded on an NYSE Arca, and the funniest thing was they did this right at the end of the year when there was a hoopla over California legalizing, and I'm not kidding you, I think that uninformed...I don't wanna call these people ignorant, but it is the right word. Uninformed people looking to capitalize what was going on in California invested in this ETF, they got all this money flowing in, and it had zero exposure to California, it was a very weird structure. It was like 50% Canadian licensed producers, 50% Japanese and Scandinavian tobacco companies. I mean, it was just crazy. It's like... And I'm looking, it's like this company has nothing to do with cannabis, it's not even close. It's like zero. And that's the way that one looked. And I really still don't...I would never send anybody to that.

But there's some other funds that have developed, that aren't ETFs, that I find actually kind of interesting. I haven't really formally recommended any of them yet, but I've definitely been following them and this is a topic of great interest to me because there are some funds out there that are publicly traded in Canada, that are investing in private companies. And so it gives the public a way to invest in private companies which have better valuations often in pre-public. And, you know, I'm watching those very closely, it's very interesting to me. There's a handful of funds out there.

And then there's another fund that trades...I'm trying to remember. Yeah, it trades publicly as well. And I think he's just investing in public companies, but still, you know, I think the guy is really smart and knows what he's doing. And I don't really like to recommend these because I'm not comfortable enough yet to do so, they tend to be relatively illiquid and small at this point, Matt.

Matthew: I mean, are we gonna get like an iShares or some huge ETF company, BlackRock to come out with an ETF in the next one year, two years, five years?

Alan: I don't think so. I think unless we get some banking law changes, that's a non-starter, unfortunately. I think we're headed there, but I think your time frame was a little off. Maybe you'll be right though. At least I hope you are.

Matthew: I think that would be cool. I mean, it would just make things a lot easier, but I think maybe we're gonna need to see federal legality, it sounds like, before that could...

Alan: I don't know if we need federal legality, it's just this banking thing. I think these financial institutions have everything to lose and nothing to gain, unfortunately. So, you know, why bend over in front of a steamroller to pick up a penny or something? You know?

Matthew: Right.

Alan: They have too much to lose, in my opinion.

Matthew: Well, talk a little bit about position sizing. I mean, there's risk in a portfolio but some assets or securities are more risky than others, yet sometimes someone might have the same amount of capital in their portfolio invested in let's say Coca-Cola as they do a highly volatile cannabis stock. So, how do you kind of frame the discussion around position sizing?

Alan: So, a few things on that. So, I've done some surveys in my community, and I've just been astounded sometimes. So, I ask the questions, kind of separate questions to kind of get at the whole picture. So, I'll ask them, "How much of your assets are invested in the cannabis space?" That's one of the ones I ask. And I give the ability for them to say more than 100%, which would mean they're on margin. And you'd be surprised how many people have more than 100% of their money invested in the cannabis space. These are my subscribers. So I'm sure it's worse outside.

So, without going into all the information, I think this is another issue that some people face. Because if you're gonna invest in a company that's gonna go up 10X, do you really need to have... I mean, if you get it right and you have 100% of your money, great. But the chances are you're not gonna get it right. So, I think the people that make...that have the hardest time when the market's in a correction or down cycle, like we are right now, is that they have too much money in the sector and they have too much money in the individual name.

And I run several different model portfolios, and know, I will admit that my position sizes can be pretty big. Like, I think I have rules, they're capped at 20%. And that's a lot. You know, I don't tell people how much of the money I put in the sector. I wouldn't run that model portfolio with all my money if I were a subscriber, and I try to make that point often. So my model portfolios which have some different goals and time frames, like right this minute, I think the two longer-term focus ones have 14 names in...13 names in them. Sorry, 13. And then the more trading oriented one is at seven names right now.

Matthew: Now, I want to circle back to what you were talking about with reading SEC filings and different regulatory filings. And I'll admit, you know, you get into the weeds on some of that stuff, the language and the legalese, it's's so dry. But you actually read a lot of this stuff. Is there anything really egregious that you recall looking through some of these where you said, "Holy cow, unless someone read this, they wouldn't have seen it, and it's really egregious, and they should know about it."

Alan: Yeah, the most egregious thing I see, and you are right, they hard to read. And these companies obviously face lawsuits if they don't disclose certain things. But the thing I find lacking sometimes, and it is hard to read but oh so important, is the capital structure. And it kind of bothers me. Some companies do a great job of this, and they really lay it out there.

And just to be real clear what I'm talking about, you know, the capital structure consists of the number of shares outstanding, of course, and everybody puts that in there. That's easy to find. It's all this other stuff, the warrants and the options and the convertible notes, all these things that if somebody were gonna buy the company, they'd have to take this into account. In other words, these people have contractual rights to buy securities. Whether it's through conversion of debt, or through the exercise of warrants and options. And so this is the part that bugs me the most, because some companies don't seem to do as good a job as others, and there are some very tricky things in there. And the more scammy the company is, the more tricky it can be.

Matthew: I imagine. And just for...

Alan: Convertible preferreds. And let me give you give a great example actually so your readers can...listeners can appreciate this. There are these preferred stocks, and just to simplify what a preferred stock is, there' the capital structure you have debt in equity, equity is called stocks. Common stocks, what everybody knows, that's what trades on the exchanges typically. And the common stockholder is last in line if there's ever a bankruptcy. That's the way to think about it. Debt gets paid before anybody, and the common shareholder, he's the owner, and he's the one that gets screwed. He's also the one or she's also the one that makes the most money if things work out. So that's the riskiest part.

And they have these preferred stocks, and preferred stocks, we could talk for hours about how they work. But there's different things about them, like the voting rights, the conversion rights, rights to dividends. There's all sorts of things that make these things tricky, and they typically don't trade publicly, and most people don't even understand them. So the example I wanna share with your listeners is, there are actually convertible preferred stocks out there in the capital structures of companies that allow the holders, which is typically management or the financiers of the company, to own a constant percentage of the company.

Now, that may not strike anybody as being meaningful, but it means this. If a company goes out there and just issues stock willy-nilly, then they don't dilute themselves. These people just get to a constant percentage of the company and it creates a very perverse incentive or disincentive to keep the share count down. And it's gross, it's really...there's no reason for that. And I've caught some companies doing this, and it's unbelievable to me. I don't even think it should be legal quite frankly, but it is.

And some of them don't disclose it very clearly. You have to do things like... You have to leave the SEC document, if they're even an SEC filer, and you have to go to like the state website, Secretary of State website and get the corporate papers basically to find out how these things work. It's unbelievable.

Matthew: I think people are getting a sense listening that there's a lot of investigation work, and it's just reading and talking with other people, and kind of iterating the conversation and involving it that you get the golden nuggets and find things out. I imagine there's not a lot of huge ahas, it's more like just putting in the work and figuring out who's the best by just understanding the playing field day after day after day of reading everything and talking with everybody. Can you tell us a little bit about the community you have with 420 Investors, what they can expect, what the benefits are to joining so they can get a sense?

Alan: Yeah, sure. So, first of all, I've been...I launched 420 Investor literally five years ago, September...actually almost five years. September...mid-September of 2013. And we now have about 870 to be exact right now, in our community. And the nice thing about it is you don't even have to care what I think. There's so much to the community, the interactivity between the other members.

But, you know, I try to show leadership, there's a lot of different ways I communicate with the subscribers. So they're gonna hear from me. I have a focus list first of all, and so I take what's literally about 700 companies and distill it to 26 or 27 right now that I'm... You know, I tell people, "These are the ones I'm most interested in." Although I do pay close attention to a lot of other ones. And so I'll share information about those companies kind of in a real-time basis. I run model portfolios, three that are like real-time model portfolios and one that's a monthly model portfolio for Canadian LPs, and typically those three would involve my focus list names for the most part.

We have a chat on Wednesday...or Tuesday nights. Used to be on Wednesdays. Talking Tuesday. And that's a good opportunity for people to ask questions and... I do 10 videos a week, a very long one on Saturday morning and two a day during the week except on Friday just one, where I'm kind of for the most part talking about the stocks and not the companies, but I integrate some stuff about the companies as well. And I think people get a lot of information from those videos, but it's really one way. So, during the chat, they're able to ask some questions, and even if they can't participate live, they can email in questions. And it gives everybody a chance to hear my perspective on things they care about.

And then, gosh, the crown jewel I think is the forum. And the forum, oh God, we get about 190 discussions a week. And people can pay attention and subscribe to actually forums about the stocks they care about, and there's a lot of off-topic forums. People like to talk about the music the like or what have you. So, there's just a's a very large offering, and... You know, I've never been in a community like that. It's not something I personally have ever done, and I sometimes wonder why people do it, but then I think about how much people pay for cable TV and they just sit there and watch it. I have to tell you, this is a lot more interesting than cable TV.

Matthew: Well, Alan, I'd like to ask a couple of personal development questions to help listeners get a better sense of who you are personally. Is there a book that's had a big impact on your life that you'd like to share?

Alan: Yeah. And I remember you've asked this question in the past and I remember...I don't remember if it was the first time or the second time, but your guest the episode before me had said like one of my favorite books, it was by Clayton Christensen, and I don't even remember. Let me tell you the truth about me. I read, read, read, read, read, I just don't read books.

Matthew: What was something else you read that you find super helpful, that you think people would value?

Alan: Oh my God, SEC filings.

Matthew: SEC filings. So they're valuable but they'll put you to sleep.

Alan: I am's kind of sad how focused I am. Almost everything I read about is about the cannabis industry. And, you know, a lot of it is news, and there's stuff out there that people are publishing that I read too, but it's funny. I don't have like a great answer for them. I'm just like reading, reading, reading all the time, and there's nothing that really stands out as like, oh yeah, this is my go-to place for reading.

But I wanna get's a repetition, but the Clayton Christensen series actually I think was just fascinating. And I use it in the cannabis industry, and I think, you know, this whole idea about cannibalizing yourself... You know, I should tell you the name of the book. I'm not even remembering it. But Clayton Christensen is a professor at Harvard, and he basically said that companies need to innovate and basically cannibalize themselves, or they're gonna lose out.

And I think this is so appropriate in the cannabis space because most of these companies are starting out as flower producers. And we all know that flower is...becomes a commodity, and yes, it's 50% of the market, but that's not where the money is made. And so these companies in the space are going to have to continuously innovate. And if you're a big flower producer, you better start coming up with products to get rid of your...the way you're selling your flower, whether it's pre-rolls or what have you. It's called "The Innovator's Dilemma", Matt.

Matthew: Yes, yes, I was just gonna say that. Okay.

Alan: Sorry, I was not remembering the book. That was a very influential book, and I try to draw lessons on that for the cannabis industry as well.

Matthew: You know, we're talking about flower and extracting the oils, making edibles and having drinks. Like drinks and edibles and different consumables are kind of the next phase that are emerging. Like they've been around for a while, but for the general public, they're kind of becoming on the radar. And then after that, it seems like perhaps it's gonna be dialing in the exact experience you wanna feel, and...

Alan: Yeah, that's a tough one, but you are right.

Matthew: If they can crack that code and do it every time, you know, that's kind of the holy grail. There's another personal development question I wanna ask you. Actually two more. I'm gonna slip in an extra real quick. Is there a tool that you use that helps your productivity that you'd like to share?

Alan: So, I'm so boring on that. I think in the past I've told you LinkedIn, and I've found LinkedIn to be a great way for me to network with people. And I know that sounds silly, a lot of people, but that helps me a lot. And I would say...I don't think I've ever answered this one before, but in some ways, it's embarrassing, in some ways it's kind of cool.

We are able to do so much with running our business in "New Cannabis Ventures" on Google Docs. And, you know, we have a two-person business, so maybe that's why it's a little bit more scalable. If you had more people, it wouldn't be scalable. But with two people, I think we have like a 24-page document where we're keeping track of everything in our business. Whether it's receivables, whether it's new prospects, charitable contributions, we give 2% of our revenue to charities in the cannabis space, all these things we're able to track in Google Docs. It's pretty amazing. I don't know if you've ever used it before.

Matthew: Oh yeah, I love Google Docs. Especially I think the kind of killer point with Google Docs is that you're all literally on the same page and you can comment together on the side, you can roll back the history and be like, "Oh, I know that we had a really good sentence in here about XYZ but I can't remember," and you can roll it back to last Tuesday at 3 p.m. to see what was there.

Alan: Yeah, you're talking like their Word document thing. The one that I'm using is more their Excel knockoff. But yeah, to me it's pretty fascinating, but I'm sure there's... We're probably gonna have to move to some real software at some point and as we get larger, and... That's probably the issue, it's just not scalable.

Matthew: Well, my last question is really more about...a question about society as a whole. And it's about a recent "New York Times" article that said back in the mid-1990s there was 8,000 publicly traded companies. And as of I think it's 2016, there's only 3,627. And that means the number available, stocks available for the average Ma and Pa or the average American is shrinking, and private equity is growing and then the average person doesn't have access to that. What do you think that says about society as a whole, that the ways of accumulating assets that most people can grasp and have access to is shrinking?

Alan: So I have to call a little bit of offsides because this is...goes well beyond my expertise, but I can still weigh in on it from my historical experience. And so I think one of the things it says is not about society, it says about the complexity of Sarbanes-Oxley actually. And especially post-2008. I don't know when you said...what was the first date that you were using? 2000 or...

Matthew: The first was the mid-1990s there was 8,000 and then 3,600.

Alan: So, I think the financial crisis and Sarbanes-Oxley and all that really...I guess that Sarbanes-Oxley was before the crisis.

Matthew: That was Enron, wasn't it? Was that...

Alan: Yeah, exactly. Post-2001, so not too long after you talk about. It just became much harder to be a publicly traded company. So, you're seeing fewer of them. I still think there's plenty. And to your point about access to private equity, I mean, there are publicly-traded vehicles for public equity from what I understand.

I don't know that there's a big social issue, Matt, but a little bit outside my expertise. I feel like there's plenty of stocks out there beyond the cannabis space, and, you know, just a lot of the companies have gotten a lot bigger. And I think it's...I hear this all the time. It's expensive to be a public company, and the risk that people take as an officer of a company, to many just aren't worth the risk. It's not just the risk, it's the hassle.

And I think another point I would say is, I think it probably reflects the maturation of our society. We're not quite like Japan yet, but we're definitely an aging society and our growth rates have slowed. Don't tell President Trump I said that. Actually, they've probably picked up a little bit. But, you know, that's's just kind of the demographics, and I think that may be a symptom of that as well.

Matthew: Well, Alan, this has been really a fun conversation as always, it's a topic that most...everybody is interested in right now. Do they wanna raise capital or they wanna figure out how they can get into some investments that would make sense for them personally. If you could just throw out your websites and let people know how they can find your investment service and your other news service, that would be great.

Alan: So, for people that just want free access to what I think is good information, that would be New Cannabis Ventures. It's publicly facing, and the website there is New Cannabis Ventures, with an "S" on the end, dot-com. And there's a lot of resources there that are geared towards helping investors learn about and attract the market. And then there's things that you can sign up for, that are easily found, like our social media or our app, which has like over 100,000 active installs, or our weekly newsletter.

And then for those that really want more guidance and to be part of a community, 420 Investor, and that's all one word, 4-2-0-investor, O-R at the end, dot-com, and...I'm trying to think. What is it? @Invest420 is my Twitter handle too, and if you were to go there, you'll find links to everything basically.

Matthew: Well, Alan, thanks so much for coming on the show. We really appreciate it and have a great rest of the summer, and we wish you all the best.

Alan: Thanks, it's always great to talk with you.

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