When a market sector goes crazy, like the cannabis sector has recently, there will be endless comments from well-meaning pundits about how stupid and unsustainable it is. Clearly they are correct but does that mean you shouldn't trade the stocks?
The valuation of Tilray (TLRY) is still insane although the stock is down 20% at the moment. The cannabis sector will eventually be littered with companies that will never make any money and a number of them will be outright frauds.
This is nothing new. There has been this sort of action in markets since the bubble in Tulip bulbs in 1636-1637. Some of these bubbles last longer like the internet bubble in 1999-2000 and some of them are relatively short lived like the cryptocurrency/blockchain bubble earlier this year. Markets will always produce this sort of action at times because it is common human emotion to act in this manner.
These speculative frenzies all have a number of things in common:
- They tend to last longer than most people think they well. We have already seen this with Tilray, which was crazy when it was trading at $90 back on 9/11/18. The unreasonableness of the action will attract even more interest.
- There will be a certain number of "true believers" that are convinced that the euphoria is justified and that things are just getting started. This was particularly common in the cryptocurrency rampage. Even some high prestige money managers like Bill Miller believed that it really was different this time.
- Many traders will trade these poorly and will be burned. To some degree trading these stocks is a zero-sum game. There will be some big winners and there will be some big losers. To do well with these stocks requires a solid game plan and a very disciplined approach.
- Fundamentals don't matter in the short term. It helps when the company has a good story but you are wasting your time looking at balance sheets and income statements. This is highly emotional trading and it is better to study game theory rather than fundamentals.
- At a future date there will be pundits who will boast that they "told you so" when the bubble comes to an end and the stocks lose their luster. Such predictions are like predicting the sun will rise. We know the cycle will occur again but it is the timing that will make the big money.
Most market players probably shouldn't trade some of these crazy cannabis stocks. It requires that you constantly monitor the stocks and be ready to move quickly. You can't just buy these stocks and then ignore them while you are doing something else.
However, if you are diligent in your trading approach there are few things more lucrative than catching big moves in stocks like New Age Beverages (NBEV) , Corbus Pharmaceuticals (CRBP) or IntelGenx Technologies (IGXT) . If you want to profit from them the best thing you can do is learn how to be an aggressive trader.