It's not a real market

And you're not a real investor. Oh, wait, it's not a good idea to make inflammatory statements that aren't true or are beside the point?

The focus of today’s article is around this banger of a quote to help set the scene. 

“I don’t need to remind everybody that the quote unquote market for this sector is not a real market, right? It’s not a market where you can have a large number of investors and particularly institutions participate. So, the market here is very thin as far as the number of participants. It’s mainly retail and it’s just not efficient. We continuously see, even the largest companies in the sector, three billion dollars plus of market cap, sometimes are down 5% on just a couple million dollars traded. So obviously, this market is far from being efficient.” 

I’ve come to realize that much of this talk about illiquidity and lack of institutional participation is cope and fallacy. It’s meant to provide a plausible and ostensible excuse for the stock's poor performance, while simultaneously not attributing their poor performance to inept management teams who were perversely incentivized to recklessly grow their companies. This cope and fallacy are also meant to obfuscate any responsibility that they, the investor, had in buying ridiculously priced securities to begin with.    

There are numerous stocks that trade on the OTC whose performance has done quite well. The problem is that these cannabis investors are growing desperate and they’re essentially personifying markets and shaming them for not being more liquid.  

That’s why they’re not a real market. Hmmm, that sounds familiar to the shaming tactic used by women, “You’re not a real man.” Talk about low-brow shaming tactics.  

The underlying implication of the quote is that if things were more efficient then these stocks would trade higher in price. Notice I said higher not more efficiently. To most it’s a foregone conclusion that they’re one in the same. 

However, that doesn’t seem obvious to me. As far as I’m concerned, these stocks not being the center of attention allows their appraisal to run rich. Be careful what you wish for.  

What should a company with - 20% net income margins that’s growing revenue at 5% YoY with a 3x EV/Sales multiple be priced at?  

These people's reasoning for why these stocks are cheap is amusing. It’s not the pot stock's fault for trading so poorly, it’s the markets' fault. But it’s not the market's fault, it's the exchange's fault. But it’s not the exchange's fault, it's the government's fault. And it’s the government which is the critical decider of this daisy chain.  

Notice how it’s everyone's fault except inept management teams and investors. Talk about motivated reasoning.  

It seems to me that what he’s complaining about is largely a function of trading on the OTC. OTC markets are less “efficient” than primary markets but they’re still far from inefficient. Billions of dollars trade threw the OTC with small bid/ask spreads, minimal transaction costs and oftentimes quick fills.  

Sounds like a first world problem if you ask me.  

He’s right in regards to how a couple million dollars can move the needle on a $3B market cap company.  

Curaleaf ($CURLF) fell 8% on March 11, 2024 on 532,530K shares. Their market cap was $3.1B at a share price of $4.21. This means that $2,241,951 or 0.07% of market cap moved the stock 8% roughly.  

But it’s not just the pot stocks.  

Alphamin ($AFMJF) fell 7% on February 1 on 185,420 shares. Their market cap was $1.12B at a share price of $0.70. This means that $129,794 or 0.01% of market cap moved the stock 7%.  

Rolls-Royce ($RYCEY) fell 5% on Dec 15, 2023 on 3,560,000 shares. Their market cap was $32,240,000,000 at a share price of $3.83. This means that 0.04% of market cap moved the stock 5%.  

On and on it goes.  

These crybabies reveal their true character when you don’t hear them trying to temper one another's expectations when the stock rises 10% on light volume. Nope, it’s only when it falls 10% on light volume that this market isn’t allegedly real.  

The OTC market doesn’t seem any less efficient than local flea markets or farmers markets. And those are accepted to be real markets. Is the collectables market, car market or art market not a real market?   

Is the global tin market ($7B) not a real market because of its small dollar denominated size and lack of participants? Not long-ago uranium was an $11.6B market. On and on I can go- molybdenum, platinum, palladium etc.  

How could a market with 1,000’s, 10,000’s or 100,000’s of participants trading at least millions of dollars a day through 1,000’s of transactions not be considered a real market? Oh, I know, because there’s not instantaneous, costless, frictionless transactions due to complete liquid conditions that provide a stock price that confirms their underlying cherished beliefs.  

Todd Harrison said the cannabis industry's market cap is roughly $12.8B on the Lead-Lag Report podcast which came out earlier in 2024. Is that still too small for liquidity and efficiency purposes? And if so, what does that make tin stocks or other commodity stocks?  

And how inefficient are things? The better balance sheet and higher revenue growing companies are outperforming the worse balance sheet slower revenue growing companies. Companies exposed to large catalysts, such as Florida Amendment 3, are outperforming companies without such catalysts. Is that because the market isn’t efficient? 

Green Thumb is up roughly 100% from the bottom. But what changed? Did their EPS increase 100%? Has regulatory change occurred since then? Is this what people are alluding to when they say that the market isn’t efficient? I doubt it.  I’ve heard people say, “It got too cheap to ignore”. But wouldn’t that suggest market efficiencies occurring. So, which is it?  

THE FUNNY THING 

Time and time again I keep hearing people say that the cannabis sector needs more institutional money.  

As far as I’m concerned, the desire for institutional money is a tacit admission that retail money is dumb money.  

It’s essentially saying, “We need the inclusion of smart money in order to dilute the impact of the dumb money which dominates this space.”  

It is the smart money that helps offset, counterbalance and act as the countervailing force towards the dumb money. 

The reason you need smart money is because the dumb money which dominates the sector is just that…dumb. The smart money's job is to dilute the dumb money's influence. The smart money is needed to neutralize the impact of the emotional, impulsive, short sighted, innumerate, myopic and personally incredulous retail crowd. In other words, the sector needs some adult supervision.  

It’s actually for this reason that I’d prefer institutional money not to be involved. Quite simply, they’ll either short a lot of this garbage or just not participate.   

The funny thing is that before you know it, the same people complaining about the lack of institutional participation will be complaining about how the evil hedge funds and institutional money is naked shorting, doing ladder attacks or whatever else nonsense their conspiratorial minds can conjure up.   

To say that the cannabis sector is inefficient because institutional money isn’t participating is to say that retail is inefficient. And I’d have to agree in large part with that… they’re incentivized by their fleeting emotions, misinformed notions and stuck in groupthink.   

THE EPIPHANY I HAD 

I was really caught up on the phrase, “not a real market”.  

And I figured out why.  

They committed a No True Scotsman fallacy.  

Person A: "This market is inefficient with thin volume and minimal participants." 

Person B: "But it’s still a market; transactions occur, tight bid/ask spreads etc." 

Person A: "Well, it's not a real market. A real market would be more efficient and well-regulated." 

In this scenario, Person A is using an arbitrary definition of what a "real market" is which conveniently excludes the market in question based on subjective criteria. They are dismissing the market simply because it does not conform to their idealized notion of what a "real market" should be. 

In large part, people invest under the motto, “price confirms narrative”. The pot stocks have seen precipitous declines over the last half decade, so in order to keep their narrative intact they’ve needed to ignore price.   

This is where the claim that “it’s not a real market” comes into play.  

When it’s not a real market then that means that the results (stock price) aren’t real either.  

What’s at play here is a wonky ad hominem attack.  

A common strategy that people use when being told something they don’t like is to attack the person communicating the message. Well, they’re doing the same in regards to the OTC.  

These people are ignoring the message (stock price) by attacking the one communicating that message (the market) by saying that it’s not a “real market”. 

It’s a common practice of people to dismiss, disqualify, discredit, discount and marginalize the source of information rather than address the merit of the information itself. 

You have to remember, these people live by the motto, “price confirms narrative.” So just imagine how distraught they must feel to see their cherished beliefs being disconfirmed by the price action. This forces them to either stop being ideologues or to conjure up a reason as to why the price is wrong (after all, there’s no way that they could be wrong. LOL). This is why they attack the market structure, or whatever else is needed to disqualify the price action.  

If you can convince yourself that it’s not a “real market” then by extension that means that it’s not a “real stock price”. This allows their cherished beliefs and ego invested narrative to stay intact.  

What a beautiful subversive psyop. This is cope & fallacy at its finest.  

These people don’t like the fact that the stocks are cheap because its cheapness is evidence of the narrative not playing out. Remember, price confirms narrative.  

Let me break down their bull case for you.  

2018: If reform happens then these stocks are ridiculously cheap.  

2019: If reform happens then these stocks are ridiculously cheap. 

2020: If reform happens then these stocks are ridiculously cheap. 

2021: If reform happens then these stocks are ridiculously cheap. 

2022: If reform happens then these stocks are ridiculously cheap. 

2023: If reform happens then these stocks are ridiculously cheap. 

2024: If reform happens then these stocks are ridiculously cheap. 

I can’t really blame these people for droning on about government stuff. What else are they supposed to talk about…fundamentals? Well, they can’t, both because they’re innumerate and intellectually lethargic but also because the fundamentals largely disconfirm their belief about how these companies are cheap. So even if they weren’t innumerate, they’d turn a blind eye to the numbers due to it not confirming the narrative.  

It’s heresy to even suggest that many of these stocks are trading at fair value let alone richly.  

You come to realize that their investing strategy is predicated on faith. And there’s no point in reasoning with someone who is practicing such behaviors. You realize their valuation targets are on a Hopes & Dreams Adjusted Basis.  

MACRO OBSESSION:  

Here’s a basic outline of these people's beliefs:  

These stock prices aren’t confirming my beliefs → it’s because they trade on the OTC and because institutional money isn’t involved → because big government is stupid and sluggish.  

This idea of the federal government gets smuggled into everything, always cropping up and manifesting. Everything is the patriarchy's fault.  

You realize that all roads lead to it being the federal government's fault. Everything gets abstracted to a higher level of analysis. It's the end all be all to these people. It’s the one liner that excuses all things. It’s fundamentally a thought terminating cliche.  

Not profitable = Because of the government 

Profitable = Could be even more profitable if it weren’t for the government 

Trades on the OTC = Because of government 

Institutions aren’t involved = Because government won’t make it where they can be involved 

Lacks scales of economy = Because of the government 

Makes horrible M&A acquisitions = Because of the government the states are doing limited licenses and companies are willing to pay a premium for artificially constrained assets 

On and on and on it goes. It’s a beautiful victim narrative in which their cherished industry is held hostage by the big bureaucratic fat cats.  

All of those reasons above are true but there’s also other true reasons that are being conveniently ignored.  

Not profitable = Management teams over paid for over producing assets that created too much surplus on the markets.  

Profitable = Management teams who are concerned with ROC.  

Trades on the OTC = So what? 

Institutions aren’t involved = Why would they want profitless companies with wrecked balance sheets which are growing revenue in the single digits? 

Lacks scales of economy = If management built out reasonable square footage operations to begin with instead of borrowing to overbuild, they would be better positioned.  

Makes horrible M&A acquisitions = Management teams were perversely incentivized via their compensation structures which were largely based on revenue and Adjusted EBITDA growth.  

I know, I know. Asking true believers to be intellectually honest and represent reality in its fullness is like asking a bigot to stop being a bigot, it’s an act of futility.  

IN CONCLUSION  

Once again, we find that cope and fallacy is at the heart of this issue. Most things people topically say are motivated by deeper beliefs. Once you find out their patterned thinking and belief systems you can find out why they say what they say. You’ll discover that oftentimes they say truish things in a plausible and ostensible way. Once you dig deeper you discover the real motivations for their rhetorical smokescreens.