Cannabis: A Generational Wealth Creation Event?

How to play the industry that's growing like a weed. #dadjokes

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Who won the election?

Oh, that would be weed.

In every single state in which cannabis was on the ballot, the state decided to not pass on grass (as the kids say).

That means that now 1/3 of all Americans, or 109 million people, now live in states where cannabis is legal to some degree. What just happened?

  • 4 states join the 11 recreational states (AZ, SD, NJ, MT) with passed ballot measures

  • Mississippi and South Dakota add to the 33 medical states as well.

So this week we talk about how to play the industry AND I debunk some major myths on cannabis. If you already stand behind the plant and want to just get to the how to goodies, skip down to “How You Play It.” But if you still think ehhhhh cannabis is bad. PLEASE READ THIS NEXT PART.

Big HUGE disclaimer - I am a partner at a cannabis growth equity fund, so I have lots of the skin in the game.

Is it beyond obnoxious to say… I TOLD YOU SO to all the people who said me moving into cannabis from traditional Wall Street was a poor move. Meh, maybe.

Regardless, if you disagree, argue with me, you know I love that.


Myth #1: BUT IT’S A GATEWAY DRUG

(said in a screeching voice)…

The other week I got up at 3:30am to go on a four hour long series of radio/TV shows to discuss why legalizing cannabis is an open and shut case.

That in itself was a real treat, now imagine I did it with… a series of anti-cannabis news channels. I’m calling this move the, “Codie is a Masochist.”

While honestly I found everyone to be very respectful of deviant opinions… oh boy, did many of these fine humans disagree with me.

So as one does, I drank 72 cups of coffee, pulled up more facts and figures than a magician with a hat, and argued rationality vs stereotypes and fear.

The truth is history will be, and the facts are, on my side.

My case is based on math, rationalists like that.

Let’s say it loud for the kids in the back, the case for continuing to have this plant illegal is a case based on stigma, falsity, lobbying power of incumbents, centralizing power and fear of change.

So because I believe this is potentially a generational wealth creation event here… while also being THE RIGHT thing to do, let’s break it down. Nothing more contrarian than going head to head with any institution and saying your laws are capital D, Dumb.

Then I’ll give you a few ways to play the game at the end.

Here’s what I know..


The ETHICAL stance on WHY to legalize:

Stoners Are Lazy Slackers:

On particularly southern drawling host said and I quote, “Come on Codie…. Everyone knows someone who was a stoner as a kid, do you know any of them that are successful now? The answer is no.”

Le sigh.

To which I replied nicely (because media tip: if you ever want to get asked back you have to);

“It’s probably not helpful for me to list all the CEO’s and successful business people, mom’s, dad’s and incredible humans who used cannabis as they were kids because their names mean nothing to you. But let me just say the list is longer than Santa’s naughty list when he’s circling DC’s political sphere.”

Don’t get me wrong, are there people who use cannabis poorly all day? Kids who play video games and hang in their parents’ dank basement replete with lava lamps, shag carpet and a spray painted VW van? I am sure. But there are people who do that all day with food, (42% obesity rate in the US aka out of 10 people 4 are obese), social media, alcohol, heck even coffee. HOWEVER we don’t outlaw those items.

What might be useful is a list of just a few of the worlds most successful CEO’s who are and were consistent cannabis users:

Maybe you’d say CEO’s aren’t successful enough. Ok.

How about 11 Presidents who are on the record as cannabis/hemp users:

Barack Obama, George W Bush, Bill Clinton.. (all definitive proof).

Our How About Founding Fathers…

Who all mandated hemp planting in the colonies and although we can never know for sure, there is correspondence from James Monroe, George Washington, John Adams, Thomas Jefferson, James Madison, and Franklin Pierce all noting usage of hemp. Many of them even separated female and male plants which is what you do when you want to increase THC (the psychoactive ingredient).

Alright Codie that’s all fine but, what about the truth, which is you smoke one joint and next thing you know… heroin.


IT’S A GATEWAY DRUG!!:

IMHO, this is like saying boogeyman exists, or if you eat a watermelon seed you’re going to look pregnant. Anyone else told straight lies by their parents like this? Can’t wait to have kids and repay the favor.

Here’s some facts, even the National Institute on Drug Abuse (NIDA) knows that the gateway theory is flawed, stating:

[T]he majority of people who use marijuana do not go on to use other, “harder” substances.

NIDA goes on to say that:

rather than marijuana, alcohol, and tobacco being “gateway drugs” they are more easily obtained by those who are more vulnerable to hard drug abuse.

They also point out, “that you must consider additional factors when it comes to someone’s likelihood of using harder drugs – like their social environment and their interactions with those who use harder drugs.”

In summary, there is no statistical significance to the gateway drug theory.

Could that change with more research, sure? But what we do here is question everything to get to the truth through the narrative. Gateway drug theory for cannabis is just not proven.


WHAT ABOUT THE KIDS??

Another common argument against weed legalization is that it increases underage smoking. The idea is that more normalized adult use cannabis will make adolescents want to use it. Seems reasonable logic to me honestly.

You want to hear something crazy? The opposite seems to be true in practice.

According to federal data, underage smoking in Colorado dropped after legalization to the lowest it has been in two decades. And that’s not just the case in Colorado:

  • “No state that has legal weed has seen a documented increase in underage smoking.”

International Journal of Drug Policy with researchers at Columbia University, debunked a 2015 report that indicated medical marijuana laws could cause an increase in underage cannabis use. Using the same data analyzed in the earlier report, the Columbia team found:

What I am not saying—cannabis and kids is fine. Cannabis research pretty clearly shows is not good for developing brains (although Alcohol apparently is worse). I will keep my underage kids away from it. For the record, I will also keep my kids away from sugar, coffee, alcohol, processed foods etc.

The concern that cannabis can negatively affect memory and brain development in teenagers is supported by numerous studies but, with shrinking the black market for weed, underage smoking can (and apparently does) decrease.


But It’s ADDICTIVE:

Humans are funny, we can get addicted to food, gaming, social media, apparently even eating couch cushions?

That said, here’s where there are issues that we all need to know about. There is an indication of cannabis abuse it is called, “cannabis use disorder.” There’s no way around saying that cannabis can be overused and people can become addicted to it. That is all the more reason why we should regulate it. How can you have an industry that does $50 Billion in sales in the US illegally and not want to bring them into the legal fold and insure there are rules and regulations for use?


Ok I’ve made my point. Now many of you want to figure out how to invest in the space. Let me give you five things to note and an idea or two to play it.


How We Look At Investing In Cannabis?

*DISCLAIMER* Not investment advice, full disclaimer below. We also have positions in many cannabis companies given we invest in cannabis. The below is just what I did, not what you should do. Need to all be put on the big boy pants and understand your own risk profile.

Here’s how I got into the industry and how I invest in any new segment when I think an arbitrage opportunity exists.

#1 Go Wide & Diversify

The absolute biggest mistake investors tell me they made in cannabis is making a big bet up front on one company. I have seen too many investors lose millions by allocating to a very charismatic CEO with a dream. Candidly, I’ve lost money this way in angel investing innumerable times. Which is way I don’t like taking big bets in something I’m not an expert in. I like to go wide first, before I go deep. That means investing in a fund (if you’re accredited and larger) or somewhere like Arcview if you’re accredited and smaller check size. Word to the wise, usually in private sector investing if you want to go into a fund you need $75-500k.

If you can’t swing that, think long and hard about allocating to alternatives and private investments. Or dive into the world of small checks into companies with Arcview (biggest angel investing group in cannabis) or you can do ancillary products (no plant touching) at Angellist.

If you really want to allocate but don’t have 5 or 6 figures you want to commit you can also syndicate your own entity. Essentially pooling a group of capital from your other accredited buds. I use Assure as the fund admin when I syndicate anything, they’re one of the largest providers and make this super easy. Syndication is actually a great way to pretest if you want to be a VC or PE. Comment below if you want more on how to do it and how you as the syndicator make money, I can write that bad boy up for you.

#2 Cash Is King

Public markets (aka stocks) is where many people play. If you are looking to due diligence cannabis companies, I always turn to the Benjamins. Who has enough cash on hand to weather the storms to come? This was a big concern coming into the beginning of the year as highlighted by this Motley Fool graph.

Cannabis is not tech. It’s not infinitely scalable, you need lots of money to operate these companies who have big cultivations, storefronts, manufacturing, distribution and logistics. The well capitalized companies continue to eat the less well capitalized companies for breakfast. So when you’re looking at the market - think the opposite of Biggie Smalls — Mo Money, LESS problems.

Couple q’s for your DD back pocket:

  • What’s your cash on hand and runway?

  • What states are you in currently, where do you have stakes (look for limited license states)?

  • Are you banked? (If not banked say no).

  • Up and running vs licenses. In the beginning many companies played the license grab game… Not usually a winning combo.

#3 Who Is Performing Consistently?

It’s just plain fun watching some cannabis CEO’s execute. Having been early investors in GTI and Terrascend etc watching them grow is fascinating. GTI just had a massive quarter, under CEO Ben Kovlar. Terrascend is on a tear under Jason Wild. I’ve never been able to market time anything, I actually think anyone who tells you they can is lying.

All I can do is look at a market I like, find management teams, analyze how they think and how they execute and then do what Warren Buffet says:

“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."

Some stocks I’m watching, although as investors in the space we watch but personally we can’t buy… all my money is in private deals and our funds.

That said, it is EARLY DAYS. The cannabis industry had a massive pullback last year. GTI has had a massive forward moving moment this year. BUT check out a little bit longer..

This is GTI since public listing… It’s still trading today below it’s high. Most of the industry is even while profits are largely at all time highs. Isn’t that intriguing.

Given that 90% downturn in the public markets in 2019, seems to me cannabis companies are just beginning to rebound. Ain’t got no crystal ball, but I think we are just at the beginning for this industry.

#4 Public Companies I’m Watching:

For whatever that is worth ;)

#5 Companies I’m Watching Privately:

First of all, here’s all the companies we are invested in at EEC in cannabis if that tickles your little fancy. Below are some fun companies that consumers can engage with who are moving and shaking in the industry that we’ve invested in. Love to hear from you in the comments who else we should be looking at!!

  • CANN

  • Sublime (website being revamped)

  • Garden Society - I invested here privately because I’m obsessed with their chocolate edibles and I like to support killer women CEO’s (shout out Erin Gore).

  • Sunderstorm - #1 Gummy edible provider in CA

  • Urbn Leaf - SoCal Single state operator, exciting things shaking out here.

  • BDS Analytics

In summation:

When I invest I do it a little funky. First, I always invest the most in myself. Period. So I have a large chunk in cannabis, a lot in my individual businesses. The rest I keep in very conservative assets class (aka stack benjamins baby) and then a good chunk to play with.

You do you baby, my way may not be yours. But get smart on this space, it’s just going tot get bigger. And maybe even go higher. (See what I did there ;)).

Sidenote - lots talking about psychedelics ie magic mushrooms. My two cents —> It’s super early. Watch, learn, be cautious.

Questions everything (and stack revenue streams),

Codie


I’m experimenting with Twitter (@codie_sanchez) talking about Contrarian arbitrage; investing, income stacking, biz building unconventionally so let’s connect.


DISCLAIMER: This is the be an adult section, not advice, just what I did. Said otherwise: This article is presented for informational purposes only, is an opinion, and is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investment vehicle managed or sponsored by Entourage Effect Capital, LLC, Codie Ventures, LLC or its affiliates. All material presented in this newsletter is not to be regarded as investment advice, but for general informational purposes only. Day trading and investing does involve risk, so caution must always be utilized. We cannot guarantee profits or freedom from loss. You assume the entire cost and risk. You are solely responsible for making your own investment decisions. We recommend consulting with a registered investment advisor, broker-dealer, and/or financial advisor. If you choose to invest with or without seeking advice from such an advisor or entity, then any consequences resulting from your investments are your sole responsibility. Reading and using this newsletter or using our content on the web/server, you are indicating your consent and agreement to our disclaimer.

I’ll just leave you with this…