Marijuana hype is bubbling again thanks to a number of U.S. states voting to legalize recreational use and with Canada poised to do the same this coming spring. No doubt there will be some long term winners, but as with any bubble they'll be few and far between. And even those that do win, the payoff is not going to be as monstrous as many believe.
Why is everyone so excited?
Marijuana as an illicit industry is worth more than $100 billion in North America, so the thinking goes that growing operations stand to cash in huge thanks to legalization.
Slow down Cheech, put down the Doritos and think for a minute.
Pot in Canada alone is expected to become a $10 billion a year industry, but only a small portion of that money will end up in the hands of growers. After the crop is harvested it has to be processed, then it has to be packaged, next comes distribution and then retailing. Oh, and let's not forget the tax man.
All those expecting Cannabis grow ops to be gold mines, they're going to be disappointed. Some will be profitable, some.....But they'll have to manage their business well in a highly competitive environment.
Its a bubble, and as with all bubbles there are a multitude of Penny Stock promotions going on right now trying to cash in on the hype. Its no different from the Dot Com days when worthless companies put a .com at the end of a word and saw market capitalizations explode beyond anything that could reasonably be supported by financial reality, check Pets.Com for reference.
So how do retail investors get roped into these hyped up plays?
Simple, the professional industry players who prey on greedy retail investors understand something the amateur retail crowd does not. The pros understand "The Art of War" and the herd doesn't. On top of that the industry players have tools at their disposal to tilt the playing field heavily in their favor with perfectly legal deceptions that many individual traders don't even know about.
First things first though, understand that the market game is a war.....and everyone is battling over the same objective, money. "The Art of War" was written about 2,500 years ago by Sun Tzu, a Chinese military leader, and the precepts he laid out in the 5th century BCE are still true today. They have been applied to arenas beyond the battlefield, into the business world and of course the public equity markets.
Sun Tzu taught that the key to war is deception, and he set out a number of rules, including these:
- When you are weak you must appear strong
- When you are strong you must appear weak
- When your force is far away they must appear to be close
- When your force is close they must appear to be far away
I think readers will get the point. These rules can be transferred to the stock market quite simply and broken down in to two key points that the Smart Money industry players know very well.
- When wanting to sell you must appear to be wanting to buy
- When wanting to buy you must appear to be wanting to sell
Alright, now for another key concept that has to be understood when it comes to warfare, and that is to know your enemy. Let's look at things from the perspective of a penny stock company engaged in growing marijuana and looking to cash in on all the hype by getting investors excited and buying their stock.
Firstly you need to be publicly traded, and that can be a lengthy and difficult process. You have to satisfy regulators that you have a potentially viable business and there are significant costs involved in an Initial Purchase Offering. If you seriously believe your company is going to have a shot at being a long term success, then this might be the best option. On the other hand if all you're looking to do is cash in on some hype, it would be easier to avoid all the scrutiny and expense by going public via a reverse merger with a publicly traded shell.
If you don't understand that, then do some research and get reading.
Companies that enter the market via a reverse merger into an empty shell company, you're likely going to have a stock trading at somewhere around one single penny because an empty shell has no business. Now that has changed, so informing some investors who are willing to risk some capital should get some trading happening and get the share price up, maybe to a nickel or so. That jump from empty shell trading around one penny to an operating business trading around a nickel will likely attract some attention, it won't take much to get the PPS up to maybe 10 or 15 cents.
Now we're ready for some fun. Still with me?
Now you need some attention, you need retail investors to at least put your company's ticker symbol onto a watch list. For Cannabis/Marijuana companies there are a number of newsletter services and promotional outfits that will get the word out. It'll cost some money, maybe $10 grand or so for each outfit you hire, but if things work out a big pay day is coming, ya gotta spend money to make money after all. Besides, if the promoters like the potential some will take payment in stock.
Okay, so now you're pretty much set. You have your shares ready to sell, just pulling a number out of my nether regions we'll say you and your associates have 50,000,000 shares ready to be sold. Shares you've issued to yourself as compensation, those you picked up cheap after the reverse merger before the market woke up, others via warrant exercises and such.
Now all that is needed is some professional industry types to sell them. Your job will be to issue some news, something that sounds really good. You don't have to lie, you just have to be well schooled in the art that is called hyperbole. For those who don't know the meaning of hyperbole, basically its meaningless words that are made to seem meaningful.
Still don't know what I'm talking about? Okay, I will give you an example:
Bogus Marijuana Industries Makes Key Acquisition
Upper Boot Lick Ontario, (Made Up Newswire) December 2nd 2016 -- Bogus Marijuana Industries (SPLFF) an emerging entrant into the Marijuana Growing Industry today announced the acquisition of a new property as the company expands its operations in the exciting Cannabis market.
Bogus Marijuana has acquired 100 acres of land in Doobie Township British Columbia which it intends to cultivate into its flagship operation as the company seeks to become a major supplier of both medical and recreational marijuana.
Bogus CEO Jay Rolling commented: "This is a major accomplishment for the company, with Canada and numerous states either legalizing recreational use or soon to be doing so we know this will be an incredibly lucrative market, and with the acquisition of this property Bogus Marijuana is positioned very well with excellent prospects for significant growth".
Marijuana for medical and recreational use is forecast by experts to be a $100 billion dollar industry in North America in the coming years, with some even suggesting a figure almost double that within the next decade. For further information on Bogus Marijuana please visit the company's website or contact Investor Relations at IR@bmipot.com
We seek Safe Harbor
Sounds good doesn't it?
- Lucrative market
- Excellent prospects
- Well positioned
- Significant growth
Yes, it sounds good, but its all meaningless....its just hyperbole. Safe Harbor isn't a fishing village in Maine. It means that forward looking statements are just that, forward looking and they can't be relied upon. If the excellent prospects don't work out, oh well, if it turns out their position ends up being dead last investors can't complain. If significant growth means they go from $50,000 in revenue for the first quarter to $50,005 in the second quarter, too bad so sad. Some other words to look out for are: plans, measurable, synergy, dynamic....there are far too many to list all of them.
Still reading? Good, because this is where the real fun starts.
First let's recap and consider some of the costs.
The reverse merger (also called a reverse takeover or RTO) into the empty shell would cost around $1 million. The promoters we'll peg at a generous $50,000 and we'll toss in another $50,000 for general expenses. Then there's the land acquisition which we'll peg at $5 million, but it can be heavily mortgaged and can later be sold.
That's a lot of cash, over $6 million, but with the land bought using leverage you're only out around $1.1 million. You know the old saying, it takes money to make money.
And what's the pay off? Those shares that were 1 cent when the RTO took place are now trading around 15 cents we'll say. And the 50,000,000 you've hired a broker to unload, if they're sold at an average of 25 cents, they will be worth $12,500,000 in cash. If the stock gets pumped up to 50 cents, then double that to $25 million.
Great, but if they're going to be sold at an average of 25 cents, then there need to be buyers willing to pay that price. And this is where having a professional broker comes into play, hopefully you have a good one and he'll be able to maximize your profits, it could be a her but chances are its a guy. You might hire more than one.
The promoters have attracted investors, you've put the news out, everything is set. Some social media posting on stock message boards, FaceBook, Twitter etc would be good to have right now too. And maybe the professional broker you hired will put a big order on the bid side through a number of different trading houses, maybe 5,000 lots we'll say....that's 5,000,000 shares worth of buy side interest. Given that you and perhaps some of your friends or associates own most of the available shares the broker isn't going to have to worry about too many shares hitting the bid, and if they do....who cares.
Now the sheep are watching, the pumpers are pumping, the Level II quotes are being shared and it looks like there is huge buy side interest in Bogus Marijuana. Not many shares are made available on the ask side and the PPS starts climbing fast. 15 cents, 16 cents, 18, 20, 25, 30. The herd goes full retard, falling over themselves to get as many shares in this "no brainer" sure fire winner.
- Remember "The Art of War". When the pro is selling he makes the sheep believe he is buying. There might even be some pre-market activity to get people thinking that "something is up, someone knows something".
But wait!!! When those shares show up on the ask, that's going to alert the herd that there's some heavy dumping in store, right? Wrong. Not if the broker uses an iceberg order. When the stock hits 20 cents he can have 10 lots showing as "the tip" of the iceberg, the retail herd will see that. But he can have another 1,000 lots hidden "underwater" so to speak, the unseen and largest part of the ice berg. And he can do that right up though 25 cents, whatever the market will handle.
The stock trades millions, maybe tens of millions of shares in a single day. All the shares don't have to be sold on the way up either, some retail players know the game and will start booking profits themselves. When too much selling hits its time to close the bag, dump a large number and bring the PPS down closing the bag. Some retailers will average down, convinced Bogus is a winning company and that dark market forces are messing with the share price. And they are, but now its too late.
And when its all done and the 50,000,000 shares have moved out of smart money hands and into dumb money retail hands, the game is basically over. The biggest losers will be those who ride a pump all the way down. $12,500,000 generated from selling at an average of 25 cents, that cash should be enough to last at least a couple years. It'll cover the mortgage payments on the 100 acres of farm land and fund business operations. The company will have a phone line, a web site, maybe an office in one of those shared business operations or a mailbox with an actual street address.
Its a dirty game, and before you play you should learn the rules the professionals use. The game requires people with more money than brains and lots and lots of greed, and those things are never in short supply. Most people won't read this miserable and pathetic little blog so the machine will go on grinding away.
NOW PLEASE TAKE NOTE
This is a blog, an opinion piece. Take nothing I have written here for granted. If you haven't developed at least a bit of a cynical nature, then start right now with what I've shared here. Research what I've written about, google things like Ice Berg order and stock promotion.
Ultimately each person is responsible for their own decisions. I hope this helps make you a better investor or trader, good luck. Oh, and if you want to share this blog posting, by all means please do....FaceBook, Twitter, on message boards, its all good. I have been accused of being an attention whore, and the only answer I can give to that is "mea culpa", guilty as charged.
Cheers
