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Cabot Marijuana Investor Update

Just a quick update on two of our positions and a bit of an educational component by using the strategy of averaging up, rather than averaging down.

I’m sending this brief bulletin to update you on three topics, Aphria (APHA), MedMen (MMNFF) and the strategy behind averaging up, rather than down. So, without further ado:

Aphria (APHA)

In last week’s update, I concluded with the thought, “It’s tempting to say that this is a bargain-basement entry point, but in fact I don’t like the stock’s weakness.” Was that weakness a harbinger of today’s bombshell, courtesy of the short-selling outfit(s) named Quintessential Capital Management and Hindenburg Research, which knocked the stock down by a maximum of 29% this morning before a partial rebound? Maybe.

The short-sellers claim that Aphria’s many acquisitions are “largely worthless,” and designed mainly to enrich insiders. Aphria, in response, said it is “preparing a comprehensive response to provide shareholders with the facts and is also pursuing all available legal options against Quintessential Capital.”

So, the facts will become known eventually—but what are we to do in the meantime? Your number one job is to avoid joining the emotional crowd; that’s a guaranteed recipe for buying high and selling low.

Instead, sit patiently, confident that in a well-diversified portfolio (you are diversified, right?), long-term trends and values will win out. (And maybe take comfort in the action of Cronos (CRON), which spiked up 30% this morning, before pulling partially back.)

These are hot, low-priced stocks in the market’s most volatile sector, and you shouldn’t stand too close. Adopt a long-term perspective, and always work hard to buy low and sell high.

MedMen (MMNFF)

Last week I admitted that MedMen was the portfolio’s problem child of the moment, and the earnings report that came out Thursday night didn’t change that.

Revenues were $21.5 million, up 1,094% over the first quarter of fiscal 2018, while annualized sales per square foot in the company’s stores were $6,188 with an 82% conversion rate across eight stores in Southern California. By all accounts, the long-term picture remains bright.

But in the wake of the botched offering and the “resignation” of the CFO, the stock is still working to establish a bottom, and at this point, 3.0 looks like the most likely basing area. If you’ve got it, hold on.

Averaging Up

Last week, under the What To Do Now section, I wrote, “Never average down; only average up, over time.” And one reader (Doctor Joe) wrote to question that advice, asking if it wasn’t wiser to average down to lower his cost basis. Here’s my answer to him.

Doctor Joe,

Averaging down is fine for value investors, who are trying to buy undervalued stocks that they “know” will be higher in the future. Generally, these are established companies whose stocks are temporarily down, so buying lower to reduce your average cost is good.

But for investors in growth stocks, where the future is less certain, the general rule is to focus on the stocks that are behaving best, which means putting more money into your winners. No one knows the future for sure, but generally the market is smarter than any one person, and thus it’s better to reward the leaders than the laggards.

In Cabot Marijuana Investor, for example, I sincerely hope that MedMen can surmount its recent troubles and resume its growth trend, but there is no certainty of that. So I will not put more money into MMNFF until we have a profit and the stock is moving up. (And today I can say the same for APHA.)

Elaborating on the topic a bit further, it’s worth noting that most people who have accumulated enough money to invest have earned the right to a certain ego: “We’re smart people, they say; we know what we’re doing, and we can rationally figure where stocks are going.” Nevertheless, the market frequently proves them wrong!

Long ago, Jesse Livermore, who won and lost several fortunes in a lifetime of investing, wrote, “Markets are never wrong; opinions are.” That statement is so central to the core truth of growth investing that an engraving of it sits over the mantel in our office—where I can look at it every day. And that truth is the core reason why for investors in growth stocks, averaging up is preferable to averaging down.