Pubdate: Mon, 02 Nov 2015
Source: Globe and Mail (Canada)
Copyright: 2015 The Globe and Mail Company
Contact:  http://www.theglobeandmail.com/
Details: http://www.mapinc.org/media/168
Author: Anthony Wile
Page: B4

INVESTORS SHOULD TAKE A DEEP BREATH BEFORE THEY TRY CANNABIS

Anthony Wile: Chief editor of the economic and investment newsletter The 
Daily Bell and chief investment strategist of High Alert Investment 
Management.

The election of Justin Trudeau's Liberals has had an immediate impact
on the investment marketplace, with a rush to invest in the handful of
publicly traded Canadian medical marijuana startups - all on the
promise of legalization of recreational marijuana use.

However, as with any burgeoning new industry, including the Canadian
cannabis industry as it "whitens" from its previous black-market
status, investors considering directing their capital there may want
to take a temporary respite from hitting the go button.

Investors who make assumptions today about what may be profitable
tomorrow will likely find their wallets considerably lightened by a
changing set of regulatory circumstances.

While a legalized cannabis industry means a substantial increase in
potential profitability for the industry leaders already invested in
the marketplace, for all investors the key questions are: What will
that new landscape look like? How will the industry be regulated,
structured and taxed? And, most important for the new or individual
investor - how best to navigate the marketplace?

There are estimates that the Canadian cannabis industry could be worth
as much as $10 billion a year, and based on the Colorado experience,
that may even be a low estimate.

However, one thing is for sure: When you have a business opportunity
with as much potential as the Canadian cannabis industry, there will
be significant changes from both a regulatory and fiscal standpoint
before the final product is rolled through the door and into the
marketplace.

NDP Leader Tom Mulcair, who made supportive comments about cannabis
legalization late in the campaign, may have the right idea.

Mr. Mulcair pointed out that although he now supports Mr. Trudeau's
position of full legalization, it will take time to properly structure
and regulate this new industry.

The alcohol industry is often looked to as a model for cannabis. It is
actually an intricate and competitive environment where regulation
collides with the market and various layers of taxation as well. The
emergent cannabis market will be no less intricate and the operating
rules will include input from every kind of stakeholder.

What the industry looks like today will certainly not be what it looks
like tomorrow. And the debate over who should be in charge of which
aspects of the business is going to be a long and convoluted one.

As the business matures, corporate and institutional pressure will
certainly build, and this will prove to be an additional complicating
factor. Does anyone really believe that a $10-billion annual industry
will be left in the hands of mom-and-pop operators and that larger
corporate interests won't try to dominate the sector?

Both government demands and corporate pressures will ensure that the
"all under one roof" producer-retailer model will be a thing of the
past. And that means the current market projections based on future
revenue potential for current producers will likely suffer severe
adjustments.

Consider the model of Washington state, where producers share in only
approximately 22 per cent of the overall revenue stream. Naturally, as
one would assume, retailers claim the lion's share.

Is this what's in store for the Canadian cannabis industry?

Remember, too, that Canada is not the only player in this sector, and
that federal decisions cannot be taken in a vacuum.

There are far larger forces at work. These forces will centre on the
forthcoming United Nations General Assembly special session on drugs
in April, 2016. Here, the 193 UN member states, including Canada, will
seek to ratify a new approach to the global war on drugs that is
expected to feature decriminalization and treatment rather than
incarceration.

Former UN secretary-general Kofi Anan, numerous past presidents of
various countries, and business leaders such as Richard Branson and
Wall Street maven Paul Volcker have been leading a global commission
for drug legalization and regulation.

Results from that conference will provide yet another overlay of
regulation and competitive intricacy that will have a significant
impact on the shape of the Canadian cannabis industry, no matter the
federal legislation.

For all these reasons, investors might be well advised to let some
time go by before taking significant positions in Canada's newly
minted cannabis marketplace.

Waking up one morning to find that the government and major corporate
participants have dramatically changed the playing field - and altered
the profitability of one or more of your investments - is not a
headache anyone needs.

Slow down. Take a deep breath. You don't need to be in such a hurry -
because if you are, you may get it wrong.

It will take a while for this industry to mature to the point where it
will be predictable and increasingly transparent. Rome wasn't built in
a day, and your portfolio of cannabis investments won't be either.
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MAP posted-by: Matt