Following the advice of hot penny stock promoters during investing booms can lead to big losses—so avoid their speculative suggestions and instead profit from better stock picks

We see clear similarities between today’s cannabis boom and the waning days of the bitcoin boom. In fact, there seems to be some overlap between the two, with both investors and stock promoters. But a comparison with growth in North American bottled-water sales may tell us more.

The history of the bottled-water boom probably tells you all you need to know about the surest, safest way to profit from the coming boom in cannabis use. Like the top players in that market, the major companies in the cannabis business will profit long after the current cannabis stock boom has ended and the hot penny stock promoters have moved on.

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Make more-informed investing decisions by understanding how hot penny stock promoters operate during a stock boom

I attended an investment newsletter publishers conference last month, and one topic under discussion was, “What will we do when the Cannabis Boom collapses?”

My view is that the collapse has already begun, but it’s likely to be a slow-motion affair. That’s because of the widespread notion—an example of a fixed investing idea—that cannabis is “The best ground floor opportunity we’ve seen since the early days of the Internet.”

I’ve seen the quote above attributed to Forbes Magazine, and that’s quite possibly where it (or something like it) first appeared. I agree with the statement, but not in the sense in which it’s being used, which is to spur investors to put money in promotional-quality cannabis start-ups.

Cannabis legalization may offer a great opportunity for small business start-ups. I met a young lady recently (the granddaughter of a friend) who has given up her two-year-old dental practice to launch a small CBD Oil store on the main street of her mid-sized hometown in Florida.

CBD Oil is a product of the cannabis plant, and is thought to have medicinal properties. She buys pre-packaged, retail-sized packages of the stuff and sells it to the public at a markup of close to 100%. It wouldn’t surprise me if she makes a good living out of this venture for a few years. She might even wind up making a rewarding career of it, if she manages to survive the rise in competition and drop in profit margins that will inevitably come as new entrants flood the market.

However, she might put herself on a more profitable and secure career path if she branched out from CBD Oil retailing and got involved in the stock promotion business.

That’s where the big money will be made in this boom, for one well-established, common-sense reason: it’s much easier to launch a stock promotion and sell it to the public in a boom like this than it is to create a new company from the proverbial ground floor and turn it into a lasting business that regularly makes a significant profit.

We’ve been investigating cannabis stock opportunities for the past few years. We’ve uncovered some established, profitable companies that are likely to profit from their participation in the cannabis business. But we have not yet found a single cannabis early-stage start-up that we can recommend with any enthusiasm.

Small and startup companies have little chance of gaining a lasting competitive edge against established food and drug makers.

The bottled water boom offers some key lessons

In the past decade or two, bottled-water sales growth has been a sizeable sales and profit booster for several big soft-drink and beverage companies, such as Coca-Cola, PepsiCo, Nestle and others. In five or 10 years, retail cannabis products could be as common as, say, bottled water.

Despite all this growth, I can’t think of a single bottled-water start-up that did an IPO while this boom was underway and was a great success for individual investors.

No one can predict the future. But the history of the bottled-water boom probably tells you all you need to know about the surest, safest way to profit from the coming boom in cannabis use. Major companies will profit in the cannabis business, long after the current cannabis stock boom has ended.

Learn to spot “orthodoxy” among hot penny stock promoters so you can make smarter, more stable investment choices

In the 1980s, the Vancouver Stock Exchange was a world centre for trading speculative stocks. And at that time, I used to advise buying some Vancouver stocks that seemed like they had a chance of success, and recommend selling or avoiding others.

That’s when I noted a recurring pattern: when I advised selling a stock, the company hardly ever responded in any way. Assuming they knew about the sell recommendation, it seemed they just wanted to avoid any unfavourable attention. The rare exceptions were companies that were particularly successful in promoting their stock, but seemed to have the least likelihood of success as a business.

Rather than ignoring our sell advice, hot penny stock promoters of some doomed business ventures would send incredibly long, detailed, indignant letters. They would insist that I explain how I came to such a ridiculous conclusion, and demand a retraction. But I never did find reason to change any of these recommendations. So I’d add at the end of the piece, “We still think it’s a sell.”

At the time, I wrote these penny stock promoters off as liars and cheats. Looking back now, I’d say that’s the simple way to look at it. There is another explanation: this is an example of a form of “orthodoxy” that can develop within a business or a penny-stock promotion.

People often think of orthodoxy as an attribute of religious groups. But it’s an all-too-human phenomenon that turns up in many parts of our lives, including science, nutrition, finance, investment and elsewhere. People incorporate their strongest beliefs into their social lives, livelihoods, positions in society and investing. Questioning their orthodox dogmas makes them fear that any change will undermine their income, jobs or reputations.

Bonus tip: Use our three-part Successful Investor strategy to boost your portfolio returns

1. Invest mainly in well-established, mostly dividend-paying companies;
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How likely are you to invest in a cannabis start-up company over a major brand getting into the market?