There are very few people in the world that fall in the WW[BLANK]D category besides probably the big man himself. (Not Talking about Jesus Christ)
BUT investors around the world often find themselves asking ‘What Would Warren Buffett Do?’ just before or after making an investment. Is it the right move for me? Will it make money? Should I take my profit or loss now? All great questions but in the end I would say that it all comes back to the Oracle of Omaha himself. So with that, What Would Warren Buffett Do in the case of an investment in marijuana stocks?
Big Buff’s Strategy
To really grasp this to its fullest you really need to strip it down to the bare bones of Buffett’s investment fundamentals. Warren Buffett is one of the richest men in the world. He built his fortune using a simple yet powerful investment strategy. His investments are long-term positions, accomplished by the purchase of strong companies that are trading well below their intrinsic value. In a speech at Columbia Business School, later adapted into an essay, Buffett introduced what he called, “The Superinvestors of Graham-and-Doddsville.” (Benjamin Graham — whom Buffett studied under at Columbia — and Dave Dodd, with whom Graham wrote the book on security analysis…literally)
“The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in that market.”
In other words, Buffett doesn’t think about buying a stock; he thinks about buying a business. Buffett explains his thesis is based on the idea that the investors of Graham-and-Doddsville could care less about when they buy stocks, or be concerned about a stock’s beta or the “covariance in returns among securities.”
“These investors are businessmen buying pieces of businesses, not traders buying stocks.”
So when you think of it in a way of an acquisition based approach, the ideology of an investment versus the action of a trade takes a more profound meaning and with it, an entirely new sense of placing value on a stock and its underlying company.
Are Marijuana Stocks Warren’s ‘Pot’ of Gold?
Some would say that marijuana stocks could offer several key factors that Buffett looks for in the investments he makes. For starters, Buffett relies on long-term trends and doesn’t necessarily concern himself with a bad quarter here or there. As long as business is growing and the product continues to “sell itself”, he is content (coming from a simplistic view of the WWWBD approach). Banks, insurers, soft-drink makers, and railroads for example all benefit from a growing population that needs access to cash, ability to protect themselves from those unseen circumstances, and who can argue with Santa Claus pounding a glass bottle of Coke during the holidays? When it comes to popular opinion, it would appear that as Americans, we’re all starting to look at weed the same way others look at Coca Cola…sure its loaded with sugar but “it’s not that bad.”
A recent Gallup poll conducted just prior to the midterm elections shows that “public support for legalizing the use of marijuana has clearly increased over the past decade.” Furthermore “with a super-majority of younger Americans supportive — 64% of those aged 18 to 34, contrasted with 41% of those 55 and older — it seems inevitable that [legalization outside of more liberal states] will eventually change.”
Also in line with Buffett’s philosophy, price elasticity comes into play or rather the propensity for someone to buy a good regardless of price. Marijuana could be seen as an inelastic commodity as so far it seems no matter what the price is, people are willing to buy. Marijuana, in turn is something that at this point has a consistent demand unrelated to any other economic factors. Put another check mark in the “Buffett box”.
No Smoke, No Mirrors…Just Barriers
One thing that may not necessarily appeal to the Warren Buffett philosophy is the relatively easy road to getting involved in the marijuana industry. Seemingly, it doesn’t appear that competition would be hot enough to have 4 or 5 major industry leaders to shake up the MJ space…just yet.
While rules and regulations definitely put up a wall when it comes to getting approved for a license (as a marijuana retailer), and patents would protect drugs developed by MJ companies focused on pharmaceutical applications, entering the marijuana industry isn’t all that hard…just look at the myriad companies already doing it in the penny stock market.
But here’s where the hook might be and it actually starts in the auto industry. A recent article in Bloomberg Business Week cites that “In buying a chain of car dealerships, Buffett’s Berkshire Hathaway (BRK/B) sees plenty of moats (barriers to entry) and a clear path to consolidation.”
The industry is highly fragmented, for example the 10 largest U.S. dealers account for less than 10 percent of new vehicle sales (according to Morningstar). Buffett’s Berkshire Hathaway has plenty of opportunity to buy other dealers and help concentrate the industry This not only gives the company a cost advantage but by taking more of a “roll-up” approach, it gives pricing advantages as well. Remember the reason why I said he might not like the industry? Well it could be exactly why he should like it in the end. In essence Buffett’s strategy would make him an industry leader that the market is currently lacking.
Could The Future Hold A Berkshire That Purports A Position in Pot?
Right now it’s probably not a likely avenue that this conglomerate would jump into. We’re not even a year into the first legal recreational states reporting fiscal tax revenue nor is the country unanimously legalizing the drug. It’s a very interesting scenario: You can go from Oregon to Washington with a joint and no one should seemingly care but the minute you cross into another state, you could potentially get put in jail for life!
WWWBD? Probably stay far away from an investment where buyers of the product potentially face that kind of outcome. So until the industry levels out, there is a clear track record of strong & consistent revenue, and until the industry is fully accepted in all states, I don’t foresee the ‘Oracle planning a portfolio strategy on marijuana stocks in the near future…but stranger things have happened so time will be the judge here in my opinion.
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WWWBD….that’s a good one. Obviously Warren has the disposable income to allow him to not have to worry about it if a company has a bad quarter. But regardless…good article.
He is definitely one for frugality when it comes to investment choices, however with his more recent philanthropist and charitable endeavors, the marijuana industry really does top many of the sustainable medical solutions out there. It could be viewed as a philanthropic move to invest in such a market.