The title of wealthiest man in the world may not go to Warren Buffet, but, arguably, he could be the world’s greatest investor. Buffet’s journey as an investor began in the 1950’s with less than $10,000 and the creation of his company, Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B). Since then, billions and billions in wealth have been generated by Buffet and Berkshire Hathaway, bringing Buffet’s net worth beyond $86 billion as of February 25, according to Forbes.
Over the years, Buffet has employed a fairly simple strategy for his investments. He starts by searching for business models with enough stability to succeed regardless of the competency of the management team. Then he holds onto these businesses long term, allowing himself to benefit from the natural appreciation in the companies’ values over time. Berkshire Hathaway currently holds in its portfolio several dozen companies, with more than five dozen additional companies purchased over the years. The company maintains $116 billion at its disposal for the purpose of buying into other businesses whenever Buffet, Charlie Munger (his right-hand man), and Berkshire’s investment team find options they deem worthy of investment.
Investors may wonder if Warren Buffett would ever consider buying into marijuana stocks.
It’s an interesting hypothetical question worth considering due to several aspects of the cannabis industry that would likely appeal to Buffet.
The current and predicted long term growth of the legal cannabis industry is attractive. The industry is expanding in leaps and bounds, with legal marijuana sales in North America projected to triple to $21.6 billion between 2016 and 2021, according to ArcView’s research on the cannabis industry. It’s the kind of growth that turns investors’ heads, possibly even Buffet’s.
More specifically, the Canadian marijuana stocks market is on the verge of explosive growth as it awaits the green light to launch legal recreational pot sales nationwide, an event expected to occur this summer. Parliament votes seem to be in place and a tax-sharing agreement has already been worked out among the provinces for the next two years. As hurdles to legalization are falling by the wayside, the road ahead seems to point toward a legal market with potential for considerable profit and investor payoff.
The second point of attraction for an investor the likes of Buffet is the non-cyclical nature of the industry arguably owing to the fact that the legal marijuana industry hasn’t been around all that long. The principle is, however, that demand for medical and recreational marijuana should be fairly consistent, even under conditions of recession or a slowing of economic growth. The challenge lies in accessing accurate data on cannabis purchases and consumption, since the drug has long been illegal and only recently shifting toward legal markets. But, assuming the legal cannabis industry is, in fact, non-cyclical, this would be a major draw for Buffet.
The more likely reality is that marijuana stocks are still too flawed to attract investment from Warren Buffet.
For a top-of-the-world investor like Buffet, several positives in favor of the cannabis industry won’t cancel out the negatives.
For starters, he would have have to cut drug development companies focused on cannabinoid out of the picture. There is a reason Berkshire Hathaway steers clear of drug developers: the time investment. Buffet and his investment team have neither the time nor the inclination to invest their energies in combing through copious stacks of clinical trial data. Since the majority of drug-makers in the cannabis industry are still in clinical stages of development, they are outside of Buffet’s investment parameters.
Another negative for Buffet, and the larger issue at hand, would be the bald truth that the marijuana industry is still too young to have established a successful track record. Sales growth may be through the roof, but, only a few of those marijuana stocks have been able to demonstrate consistent earnings.
Buffet and his Berkshire investors would reject that idea of purchasing small-cap businesses on over-the-counter exchanges. Their portfolio contains only mega and large-cap companies, which are traded on prestigious exchanges, like the New York Stock Exchange (NYSE).
Lastly, there’s the not-so-minute detail of the legal status of cannabis in the majority of countries. In other words, countries where it is fully legal are still in the minority. Investing in a largely-illegal business model and lacking a clear path for growth long-term would pose far too great a risk for Buffet and his shareholders.
There are a few marijuana stocks offshoots that, hypothetically speaking, may one day satisfy Buffett’s criteria.
There are two companies which Buffet may consider to be the marijuana stocks to invest in, even as the industry, overall, will likely evade his interest until it’s matured and generating consistent profits.
Firstly, Cannabis Wheaton Income Corp. (NASDAQOTH: CBWTF) is one of the first royalty companies in the industry. The company sidesteps much of the overhead costs that go into maintenance and production of marijuana by providing the necessary funding to growers for expansion projects. Cannabis Wheaton receives, in return, below-market rates on a percentage of the growers’ yield which they turn around and sell at market prices and profit from the difference. Though in the early stages and considering a royalty model is highly capital intensive, it’s high internal rate of return (60%) could tip the scales once Canada follows through with legalization of recreational marijuana.
Secondarily, Buffet may be interested in the marijuana breathalyzer movement. As controversial as marijuana can be, what is unquestionable is its ability to impair drivers. One of the issues facing legal states and countries is providing law enforcement with suitable methods of testing drivers for impairment, to decide when an offense is grounds for arrest. What complicates the issue is the ability for THC – the addictive, psychoactive component of marijuana – to remain in a person’s system for weeks following use. Clear guidelines and laws do not yet exist, as they do with alcohol, for acceptable blood content for marijuana use.
Note, these comments are all hypothetical and based on Buffet’s history of investment criteria.
(For more on royalty models, read Royalty Company Provides Investors A Safer Way to Play with the Legal Cannabis Boom.)