(image credit to warrior trading news.)
If you have spent much time on Reddit message boards or paying attention to capital markets you may have seen that “Pot Stocks” recently took off. A combination of M&A within the industry, anticipated liberalization, and high short interested loaded the spring that sent the market caps for several of these companies surging. Many of you know the “Golden Rule.” Whomever has the gold makes the rules. Basically, these companies were given a big pile of gold this week.
The gold is in the form of appreciation in their market capitalization. Companies with higher market capitalizations get better credit ratings and in turn get favorable loans. They can use their stock as currency/collateral for these loans. Larger companies attract more investors which help support their price, ergot their underlying value. Also, companies can issue shares at high evaluations and use this cash for operations and growth.
I’ve spent the majority of my life not understanding how companies are valued and raise money. It is only recently that I began to understand that potential profits and future revenue attract capital like a super magnet. These companies are not profitable, and their revenues are minuscule yet they carry market capitalizations in the billions. All of this rests on the hope that marijuana has a bright monetizable future in the U.S. This made me pause. Does marijuana’s bright future actually benefit anyone?
When you buy stock in a company you are indirectly loaning them your money through the processes above in hopes they will return a more of it to you at a future date. When investing responsibility, one puts their money to work in companies they hope are going to benefit society. Tobacco companies, oil companies, and irresponsible utilities have suffered significant capital out flows partly due to the idea that they are detrimental to our health and climate. ESG (environment, social, and governance) funds have been raised to highlight companies that are socially responsible. I’m not going to try to defend tobacco and oil companies. They should be scrutinized. However, Americans are quite choosey on whom they decide to attack. There are plenty of other industries that should be seeing capital outflows.
I take care of many patients that use marijuana regularly. They are not better off. If you are a marijuana user you are lucky to break even. What that means is it doesn’t impair your life significantly. Marijuana is far more likely to be detrimental to your health than beneficial. There is a strong association between regular marijuana use and psychiatric disease. It impairs your cognition, memory, and reflexes. It will make you virtually unemployable in many fields. It is strongly associated with the development of lung disease.
And to think that you cannot develop an addiction is simply naïve. It is just as habit forming as any other substance. My practice consists of adults. Most of the daily marijuana users I care for are under employed or unemployed. They require assistance from several government programs to get by. They use their meager subsidies to perpetuate their habit. This may be a biased view since I'm sure several of my patients do not disclose their THC use, but the one's that do are typically struggling.
There is really no role for recreational marijuana use in society. Your potential payoff is getting high. Your downside; Psychosis, apathy, further substance abuse, mood instability, paranoia, generalized anxiety, and going broke, is much greater than the upside. You risk a lot for that "high." Like most risky behavior, people tend to ignore the downside. Maybe, you could argue that artists, musicians, and comedians require some type of mental alteration to push the creative edge.
My expectation for medicinal Marijuana will be similar. Outside of chronic pain management it is likely to be a “nothing burger.” It does not promote weight gain in cachectic or anorexic individuals, in fact it may worsen these things. It certainly will not improve productivity or social anxiety disorder. There will likely be minimal to no role for it in the treatment of epilepsy. Should you decide to treat your chronic pain with THC, you will simply continue to have chronic pain. The only difference is now you are under the regular influence of a substance that you have to manage. To remain out of pain you will have to keep using. No real difference compared to opiates.
Marijuana is public health issue. Not a legal, or a libertarian issue.
Marijuana is not the only product detrimental to health that has seen significant capital inflows over the past several years. Even though COVID gets a lot of attention it is not the worst pandemic facing Americans. Obesity is. Not only is the incidence rising, the curve is turning convex. The obesity rate topped 40% in 2018. The rate is higher in minorities. Yet, the companies contributing to America’s obesity continue to experience significant growth in value. Is this responsible investing behavior? Should your money be going to companies that harm the health of your country, which in turn raises your taxes at the same time reducing the percentage of eligible working adults?
You can get addicted to anything. Including Food!
Health Insurance companies spent about $200 billion per year in direct costs to treat obesity. This doesn’t include all the opportunity costs due to missed production of obese individuals. It also doesn’t include the cost of peripheral diseases related to obesity. These include management of arthritis, depression, anxiety, and sleep apnea. Yet we flood companies driving obesity with cash.
Pepsi, Coca Cola, Mcdonalds, Dunkin Brands, Starbucks, Chipotle, etc…are making America huge. Pepsi (which also owns Lays chips) has a market cap of $185 billion and has a 3-year return of 23%. Mcdonald’s has a market cap of $159.6B and a 3-year return of 40%. Chipotle, little innocent burrito making chipotle, has a market cap of $43 billion and a 3-year return of 400%!! I’ve stood in line at chipotle many times (my daughter’s favorite meal is black beans and rice), believe me, none of those burritos are under 1000 calories. Don’t get me started on Dunkin Brands and Starbucks, whom are likely responsible for a 10% increase in the prevalence of adult onset diabetes.
Investors get up in arms over companies that don’t have enough diversity in their board room, or not enough minority CEO’s, which is fine, there should be more diversity. There should be more opportunity for minorities in these positions. But the impact from these changes is difficult to determine. Maybe they are good for society as a whole, maybe not, it depends on the individual hire. Yet we are perfectly content to continue to take returns from companies that perpetuate the deteriorating health of this country.
There are some companies in the health space that are doing well, but they are dwarfed in comparison to the fast food companies, and outnumbered significantly by “pot stocks.” LULU Lemon and Peloton are working to bring fitness to the masses. They are revolutionizing the exercise space. However, most of their products are too expensive for the average American. Planet fitness is increasing access to exercise space for many Americans, but have to gouge their franchisees with recurrent fees in order to improve margins that are attractive to investors. Not to mention, the COVID pandemic is an existential threat to their business.
There are virtually no publicly traded companies attempting to solve the food desert issue. Amazon, with all its might, has done absolutely nothing to extend the reach of Whole Foods to markets that desperately need healthy, affordable foods. It remains a high-end niche grocery store for wealthy suburbnites, while the poor remained trapped in food deserts surrounded by McDonald’s, Burger King’s, and KFC’s.
Corporations are doing very little to reinvest profits in their communities to improve safety and parks that promote physical activity. Many of my patients don't feel safe going to their local park, or even walking around their neighborhood.
I’ll save the pharmaceutical companies for another post. All I will say is that we rely far too heavily on them to innovate for self-inflicted diseases. This reliance is very costly and burdensome to individuals and society.
It is no surprise that companies like McDonalds and Pepsi continue to grow. It is because they are continually supplied with capital. We live in a society where it’s easier to get a quarter pounder with cheese than an apple. There will be a similar growth in Marijuana supply if these companies are continued to be ripe with cash from investors. Temptation will be everywhere.
Most individuals I speak to on these issues seem to approach something like addiction, whether it be food or a substance, from a position of strength. Common things I hear are: “Oh, I can stop whenever I want to.” “It doesn’t affect me like that, I just enjoy it, I’m not addicted.”
In general, it's better to be humble. To be a little afraid of yourself. The human brain tends to give into temptation. Just about every religious text addresses it. They all say you should guard against it. And there is truth to that. Exposing yourself to pleasure that appears risk free tends to work out poorly, because it's probably risky. The risk is just hidden. There is always a cost. A yin to the yang. That pleasurable thing takes hold of your mind and you crave it. Just like any other drug or indulgence, marijuana will be abused, not by all, but by enough of us. It will become one more landmine you and your children will need to side step to thrive in this world.
So, when you send your hard-earned money off to a public company to work for you, think about the end product. Is that product something you support? Is the world better off because it exists? Or am I supporting something I know to be detrimental to those around me?
Invest responsibly.