'Far too much volatility: Money manager steering clear of pot stocks
For one young investor, riding the green rush hasn’t exactly gone as expected.
“Performance-wise, it’s been crazy,” Shayan Tabaei, a 24-year-old software developer who lives in Richmond Hill, Ont., said in a phone interview with BNN Bloomberg.
Tabaei, an active participant in the popular “Weed Stocks” discussion forum on social news network Reddit, started investing in stocks for the first time in February. He has held pot stocks almost exclusively, with the exception of a recent position he took in a technology company.
Tabaei’s experience highlights a broader trend among young Canadians who have jumped into stocks amid frenzied investor interest in the marijuana sector as the country prepares to legalize recreational use in October. But the wild swings in cannabis stocks have been a rude awakening for some, underscoring the case for a more cautious approach — perhaps especially for novice investors.
“Definitely there’s been surprises. There’s been times where I think this is a great buy and then a couple weeks later, the stock drops,” Tabaei said.
“I went from being 25 per cent under overall in my portfolio to being 30 per cent up. Now I’m six per cent up,” he added. “I’ve never cashed out any big amounts. The lesson learned to me is to take profits as they come.”
Tabaei said he became interested after learning that a good friend of his “was making a decent chunk of change” from marijuana stocks.
“He was eventually able to pay for his wedding ring just from his profit from one sell. That intrigued me.”
Tabaei also saw an opportunity with imminent legalization.
“This is like the second coming of [the end of] prohibition,” Tabaei said. “The industry is new … When a bunch of the big tech companies were new, all of a sudden they just blew up out of nowhere. So I always had the mindset that the same thing was going to happen for pot stocks.”
Many Canadian millennials are taking an interest in investing in cannabis stocks, according to two money managers who advise young investors.
Jacob Newman, the outgoing president and previously a portfolio manager at Ryerson Investment Group, was responsible for leading the Ryerson University club of 25 students who collectively managed a $1-million virtual investment fund. Before joining the group, members make a 90-second elevator pitch for a particular stock.
“At least 15 to 20 per cent of all pitches were cannabis-related. So I would say there is definitely a trend that people are getting into the markets more so because of it,” Newman said. “I don’t know on the street, but from a university perspective, it’s definitely there.”
Meanwhile, Wealthsimple's chief investment officer Dave Nugent says that many of the company’s clients ask about cannabis stocks when they start investing with the online investment service.
While 80 per cent of Wealthsimple’s 100,000 clients are 25 to 45 years old, about 40 per cent of its clients are first-time investors. Wealthsimple does not have an exchange-traded fund specific to the cannabis sector, but one of its ETFs that can be included in client portfolios — the S&P/TSX Capped Composite ETF (XIC.TO) — currently consists of pot stocks including Canopy Growth Corp. (WEED.TO), Aphria Inc. (APH.TO) and Aurora Cannabis Inc. (ACB.TO)
Nugent said he worries about new investors moving into pot stocks without knowing what they’re getting into.
“My fear is that people are basically buying the sector or the names just because they want exposure to the fact that weed is going to become legal in Canada, and they really don’t know much more than that,” Nugent said.
He warns that the hype surrounding legalization has already been priced into the stocks.
“The easy money has already been made. It’s already been telegraphed to the market that the government’s already approved legal weed,” Nugent said.
“At this point in the cycle, there’s going to be winning and losing companies and you have to have a plan for how you’re going to get in and how you’re going to get out — if you’re going to get out.”
Nugent suggests young investors diversify their portfolio and “do your homework” to mitigate volatility.
“It’s totally fine to have exposure to the [marijuana] sector, but make sure it’s not going to make or break you. Betting your entire savings on one sector has never been a good idea, no matter what the sector is,” he said.
“Make sure you really do understand how the valuation is put together and why you’re paying the price you are paying.”