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How To Invest In (Legal) Marijuana

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buzz-on-us-cannabis-stocksLegalization of marijuana is making great strides not just in the United States, but also on the international stage. The Mexican Supreme Court recently took a step toward legalization with a November 4 decision allowing the plaintiffs in the case to legally grow and use marijuana for recreational purposes. Mexico is just one of the many Latin American and Caribbean nations making the move to legalize. Uruguay is already there and has recently chosen two companies, backed by serious investors, to produce the marijuana that will be sold in the nation’s pharmacies.

Investment opportunities follow marijuana legalization, from state to state and from nation to nation. Now, the return on investment (ROI) isn’t on par with illegal black market marijuana, but legal marijuana investment does carry some distinct advantages, despite the somewhat lower ROI. These include a greatly reduced risk of prison, robbery, violence and death. Hands down, legal is the way to go when it comes to marijuana investments. Like the tortoise said, slow and steady wins the race.

However, one thing legal marijuana investing does have in common with the old-school black market investing is that, right now, this is still a high risk investment. Logic indicates that over time, as this new industry flourishes and matures, as regulatory, production and distribution systems develop and legal policies align, that risk will decrease. Many industry watchers are comparing the circumstances surrounding current marijuana investment opportunities to those Joseph Kennedy encountered – and profited greatly from – when alcohol prohibition was repealed in the U.S.

Strategic Investments, Positioning For Success

Joseph Kennedy, businessman, politician and father of President John F. Kennedy, U.S. Attorney General Robert F. Kennedy and Senator Ted Kennedy, was a sharp trend watcher and investor. Kennedy positioned himself perfectly to take advantage of the major investment opportunities that became available once alcohol was again legal for recreational use. Prior to the repeal of Prohibition, he dabbled in the then-legal medical alcohol market. People with prescriptions from a doctor, dentist or veterinarian could legally buy alcohol from their pharmacist.

Trend watcher that he was, Kennedy made some excellent business connections during his medicinal alcohol permit days. During the transition from illegal to legal, Kennedy engaged in a calculated alcohol investment strategy. Before the formal repeal of Prohibition, he bought stock and made distribution deals, traveling to England with President Franklin Delano Roosevelt’s son James to secure a major import and distribution deal. When alcohol became legal again, Kennedy’s profit production structure was already in place. His strategic investment plan produced millions of dollars.

Yesterday’s Lessons Do Apply

It’s been said that history may not repeat, but it often rhymes. There’s a lot to learn from Kennedy’s approach to investing in post-prohibition alcohol, lessons that can be applied to post-prohibition marijuana. In addition to the more obvious investment opportunities that lie in publicly traded companies serving the cannabis-based pharmaceuticals industry, such as the NASDAQ-listed British biotech company GW Pharmaceuticals, there are investment opportunities to be had in marijuana production, processing, distribution, financial services and more.

Step back, look at the big picture, including cultural and legal trends, and formulate an investment strategy to place you in the post-prohibition profit zone, hopefully ahead of the soon to be crush of competitors and pushing hard to catch up latecomers. Learn about the processes involved in production and distribution, so you can recognize peripheral investment opportunities. Some of these opportunities can include companies that manufacture indoor growing equipment, such as grow-lights and hydroponic growing systems, and companies specializing in extracting THC and assorted cannabinoids for pharmaceutical use.

Adjust For Risk

While there are many similarities between the shifts of alcohol and marijuana from illegal to legal, there are also some differences to be aware of, differences that may seriously impact investment risk for the immediate future. One of the primary reasons that investing in legal marijuana should be considered high risk is that, despite being legalized to one degree or another in 23 states, with ballots coming up in 2016 for additional states, marijuana is still illegal at the federal level.

Although the federal government is not currently actively enforcing those laws in states that have legalized, California fought quite a battle for years against state-legal dispensaries and grow-ops being busted and assets – liquid cash, in particular — confiscated by the feds. There is always a risk of asset loss for people investing directly in growing operations and retail sellers in the United States until federal law falls in line with state laws.

So, in devising an investment strategy, the short-term transitional period focus may best be weighted toward peripheral and foreign investments. Diversification helps to mitigate overall risk, as losses in one area may be covered by gains in another. However, the ambitious investor with an eye on the long-term, post-transition potentials of investing in marijuana may do as Kennedy did, use this period to make valuable industry contacts for when prohibition is federally lifted.

At that point or just prior to to federal legalization, according to individual risk tolerance, an ambitious investor can start making more directly marijuana related investment moves. Some industry watchers point to cigarette companies, suggesting that marijuana investors would be well served by being poised to invest in their stock at the right moment. That is because major cigarette companies have distribution channels already in place, are accustomed to operating in a highly regulated industry and, once marijuana is fully legal, one or more are likely to step into the marijuana trade.

Other Opportunities To Consider

The American legal marijuana industry is starving for financial services. Drug laws have made it difficult for marijuana businesses obtain standard financial services, including basic banking and business lending services. Right now, the industry struggles to bank about $3 billion in state-legal pot sales revenue annually. Native American tribes are using their casino related financial experience to step in to help fill that gap. One recent partnership, CannaNative and MPS International (MPSI), is an example of that. MPS provides armored car service to move marijuana money to tribal banking facilities.

When it comes to business lending, there are a number of marijuana investment funds, such as Mentor Capital, Inc., that offer business loans to marijuana related businesses. There are also plenty of investment opportunities for peer-to-peer lenders, both equity-based and straight forward loans, in which the ROI lies in the interest rate charged for the loan. However, as with every investment move you make in this industry, due diligence is essential.

Penny stocks are high risk investments, but that is where many marijuana, cannabis and hemp companies stock trades take place. MPS International stocks trade on the high risk over the counter (OTC) markets, as do many fledgling marijuana related businesses. Mentor Capital, Inc. is trading on a higher OTC market tier. This is a highly volatile market, one that should always be approached with care and caution.

Not all of the businesses found on the OTC markets are going to make it through until prohibition is lifted on the federal level. Because legal marijuana is a new industry, many of these businesses are start-ups, many are immature and under-capitalized as well, increasing their likelihood of failure. However, there are some strong players to watch. And, watching is the key. Before investing, find out as much as you can about the company you’re considering investing in. See what you can find out about its top people. Study its performance history, then watch its performance in the market for a while before you invest.

Think Long-Term

ROI is nice, especially when you can see it in the short-term. However, if history does provide accurate guidance, that’s not where – or, perhaps the better word is when – the real money is. The United States is approaching the halfway mark. Once a few more states legalize, over half of the states in the nation will have defied the federal government and made marijuana legal. It seems fairly safe to say that the federal government will legalize marijuana in the not too distant future. With federal legalization comes industry stability and decreased investment risk, and that is where real profits and serious money will be made.

An Historic Opportunity

This period of marijuana investment has all the markers of being an historic opportunity, just as Prohibition and its repeal was for Joseph Kennedy. However, it’s essential to recognize that historic doesn’t mean easy and it especially doesn’t mean low-risk, not in these early stages of the legal marijuana industry. For a strategic thinker with a sharp eye for business, social and legal trends who has significant risk tolerance and is able to absorb a few losses, investing in legal marijuana can yield remarkable gains over time.

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Inventors Can Predict the Cost and Demand for Their Products by Using This Model

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Although it takes a lot of time and effort, in the beginning, stages to create a product you imagined, the work is often well worth it when it sells well to make up for the expenses used to make it and then some. Financial success for entrepreneurs varies, depending on their marketing skills and how useful their product actually is, but most wonder how retailers actually distribute their products.

It is the same question Kris Ferreira, an assistant professor of business administration asked at a presentation at Future Assembly. Every retailer much faces tricky and tactical choices related to product placement, assortment, pricing, and inventory. Ferreira mentions that every single one of those choices would have been simple to make if retailers were made aware of consumer demands we.

She added that the primary issue for her was that she had a lot of uncertainty when it came to the demand for her product. Nevertheless, it’s a less than complicated riddle that can get solved. Ferreira believes that the trick one should use for tactical design making such as this lies in quantitative analysis. She stated that the business world uses a few interesting analytics for products. One of them is called descriptive analytics. It analyzes what has already happened. Another is called predictive analytics, which analyzes data to figure out what to do next. The third is prescriptive analytics, which uses data to choose what to do next.

These forms of analysis involve events, analytics, and products. Events include the date length, and the type of event. Analyicits consists of discount percentage, cost, relative cost of competing styles, amount of styles bought in the same subclass and event, the number of branded events in the last year, and the number of concurrent events in the department. Products include the class, color popularity, size popularity, type of brand (A or B), the popularity of the brand, and department.

Ferriera believes to be able to combine predictive analytics to predict demand with prescriptive analytics so they make tactical choices, lies in the data. She showed field work that she and her colleagues worked on along with Rue La La, an online retailer located in Boston. The Boston-based company is known to be a flash sales business that offers highly discounted and limited time offers on accessories and designer clothing. Most of the “limited time” offers that they sell in the store include items the retailer never sold at their store, and a couple of them would sell out quickly. In that event, the retailer takes it as a sign that they could have charged more for the product.

On the other side of the fence, there were products that didn’t sell well, which would signify that the products were priced too high. The primary challenge to those conducting the research was figuring out how to predict demand and create prices to maximize the revenue of the new products with no prior sales data. They decided to make a pricing decision tool that had the ability to use current data to maximize revenue on new products. The researchers took advantage of machine learning techniques that could estimate lost sales in the past (the products that sold out), and predict the demand for a new product the company would sell in the future.
While they were working on the research, they discovered that the demand for a certain product also depended on the cost of other products in the same category. From that finding, the researchers made a highly efficient multi-product price optimization algorithm to suggest a cost for all the items listed on Rue La La’s website on a given day. In January of 2015, the researchers worked alongside Rue La La during a field experiment to assist the retailer in creating optimal prices for new products they will add. The researchers were able to show how Rue La La was able to increase their revenue of products in the experiment by nearly 10% via price recommendations from the algorithm. It also had a low impact on gross sales quantity.

Ten percent may not seem like much, but it’s a big difference, especially in preventing experiencing a loss in sales. Even though the research gave its undivided attention to a flash sales setting, they are certain their techniques would also be extremely useful for just about any other retailer. It doesn’t matter if they operate fully online, at physical locations or a blend of the two. It would be beneficial to them anytime they had to create unique costs for new products they would sell before they make them available for consumers.

In a broader aspect, the work the researchers conducted positively illustrated how both prescriptive analytics and predictive analytics can get mixed to create a tactical decision-making tool that can largely impact how well sales can go for a product.

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A Trade Is Not Successful Until The Profit Is Booked

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MarketTamer | by Gregg Harris

Posted on April 6th, 2015

Being consistently successful in trading typically requires a lot of work. Sometimes you get lucky, and in extreme bull markets we all look like geniuses. But most of the time it takes a lot of work. While I’ve written a lot of software over the years to generate high probability trade candidates, I still often end up with 5 to 10 good candidates and I have to narrow the list down further. I can spend up to an hour per trade candidate to finally come up with a trade setup I’ll publish in my newsletter.

For example, over the November 22nd, 2014 weekend, after spending about 8 hours looking over my seasonal scans and checking charts and fundamentals, I came up with the stock that had the most going for it – Brinker International (EAT), the owner of restaurant chains like Chili’s Grill & Bar. The stock looked ready to break above early 2014 highs.

Click here to view the chart

What led me to consider Brinker’s stock to begin with was the impressive seasonal pattern. I stated“The seasonal pattern of EAT for this time of year shows a strong track record of gains over the next 4 to 6 months. Notice that over the past 17 years, during the next 22 weeks EAT has had only one losing year.”

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So in Monday’s newsletter (11/24/2014), I gave this trade setup:

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The stock opened at 54.38 but quickly rose above 55.50, so the trade was triggered.

I covered how the trade initially worked out in the January 5th, 2015 MarketTamer blog posting titled Another Seasonal Trade Comes Through. But up to this point, the trade was successful only on paper. If not managed properly, it could still end up with a loss.

The stock position quickly gained 13% over 3 months. But since then, EAT has settled into a sideways range.

Click here to view the chart

This may only be a consolidation phase. EAT may eventually break out on the upside for further gains. But there were 3 things that bothered me. First was the mere fact the stock had changed character. A brief consolidation would be normal. But this was now going into 3 months.

The next thing that bothered me was news came out that their same-store sales increases were below many competitors. Their polish was starting to wear off.

Finally, Brinker is due to announce earnings on April 21st, before the open. Brinker is one of those stocks that often reacts sharply to earnings announcements.

These may just be minor factors, and with a strong stock they may be meaningless. But with the first quarter earnings seasonal about to start, and rising speculation that there may be many disappointments in the results, I felt it wasn’t worth giving back any profit we had already made. I can always re-enter a position in the stock once the earnings-season smoke clears.

So in last Monday’s newsletter I told readers that I was closing the EAT position at the open. The stock gave us a nice 9.4% return (actually 10.5% return because we received two dividend payments while in the position).

Now I can consider it a successful trade because the profit is booked. But until I closed the trade, I had to continually re-evaluate the trade to see if the original conditions had changed, or if there is an upcoming event that could change the reward-to-risk setup of the trade.

So it’s not just doing the work to get into a trade, it’s doing the work to stay in or exit it with good cause to make sure it gets booked as ‘another success’.

Of course, there’s much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link:www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2015 Stock & Options Training LLC

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Bonds at bubble levels: Pro

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Charles Bobrinskoy said why stocks are much more attractive than bonds or cash? Charles Bobrinskoy is the Ariel Investments vice chairman & portfolio manager. Using history as their guide, and weighing current stock valuations and interest rates, different investment pros believe stocks have a much better opportunity than bonds to hit inflation in the long run.

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