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Tag: Investment Strategy

Weathering the Storm: How the Colorado Cannabis Industry Can Thrive Amidst Market Disruption

A perfect storm of macroeconomic conditions, including higher interest rates and rising inflation, have combined with cannabis industry-specific challenges like a growing black market, increased competition from neighboring states and supply dramatically outpacing demand. This combination has led to plunging profits for the Colorado cannabis industry. 

Beyond their impacts on individual businesses, the challenging market conditions will no doubt result in significant structural changes to the Colorado cannabis industry as a whole. While the current environment continues to evolve, it is clear that the cannabis market of 2024 and beyond will look far different than the one of today. 

READ: Polis Administration Announces Cannabis Business Loan Program

Although it’s difficult to predict where the market is headed with any real certainty, it’s critical for cannabis businesses to take a look at their own operations to identify how they can position themselves to both endure in the short term and thrive in the long term. 

In the short term, consider the steps below. 

Take stock of your financial position

Every decision you make about your cannabis business today must flow from a realistic, honest internal review of your current financial situation. Evaluate the impact of a prolonged slowdown on revenue, cash flow and profitability. This will provide a clear understanding of the resources available for sustaining operations during the downturn. It’s also important to use this time to build or enhance your finance and operations foundation to aid in making critical decisions during these uncertain times.

READ: Navigating the Economic Crossroads — Fed’s 11th Rate Hike and Its Impact on Investments in 2023

Revisit financial forecasting

The assumptions made during boom times need to be given a second look through an updated lens to ensure they remain accurate for today’s market. It’s also a good idea to make contingency plans that factor in worst-case scenarios and other potential challenges. 

Make the tough decisions

Cutting costs is an unfortunate yet necessary step during slowdowns. Every business has non-essential or discretionary expenses that can be reduced or eliminated, including renegotiating contracts and finding efficiency improvements. In addition, identify areas of your business where outsourcing could make financial sense. For example, some businesses will elect to find third parties for their accounting services and finance needs.

While these are often triage steps to survive the downturn, it’s important to also think long-term and identify the steps that can be taken to better position your company to succeed in what looks to be a much smaller and more concentrated market. 

READ: How to Prepare Your Business for Success in 2023 — Financial Forecasting Insights from Fractional CFO, Dan DeGolier

Strengthen governance and controls

A strong governance and control culture stands at the heart of every successful business. By ensuring your company’s financial and operational processes are well-documented, transparent and compliant with relevant regulations, you can run a far more efficient and profitable organization in both good and bad times. It also helps to prevent fraud and mismanagement.

Additionally, companies with strong governance and controls will stand out above the competition in a tighter credit and investment market. If you are anticipating a need for additional working capital or hoping to be purchased, strong governance and controls will be critical to demonstrate your organization’s stability and potential for long-term viability and success.  

Reevaluate investment decisions

Depending on the type of cannabis business you are running, your capital needs can be quite extensive. However, tight credit markets, rising costs and overall uncertainty can make planning for strategic investments in your business difficult. Analyze your needs and postpone or scale back projects that are not critical to current operations or strategic goals. 

READ: How to Maximize Your Investment Potential — Asset Diversification Strategies and Allocation

Find the exit

If you’ve thought about the steps above and the pathway to survival looks insurmountable, begin planning for an exit strategy. Consulting with legal, accounting and other experts can help you understand your unique situation and the available options to get out with as much of your investment left as possible. The methods of exit range from outright sale of the business to liquidation of assets or intellectual property. In your unique situation, every option should be on the table. 

The bottom line

As the Colorado cannabis industry navigates uncharted territory, business owners must contend with these complex decisions, steering their businesses through the storm with a combination of short-term considerations and long-term strategic vision. The evolving landscape holds both challenges and opportunities, and those who respond with agility, insight and a commitment to adaptability stand a better chance of navigating the shifting currents to become a key piece of the Colorado cannabis industry. 

 

Kevin Mclaughlin headshotKevin McLaughlin is a Managing Director at Centri Business Consulting, LLC and is the leader of the Cannabis Practice. He has over 10 years of public accounting and consulting experience. Kevin specializes in supporting clients with documenting the accounting treatment of various transactions, including complex debt and equity analysis, acquisition accounting process integration, and due diligence. 

Pros and Cons of Buy and Hold Strategy

Nearly every financial expert agrees that real estate and the stock market are the best ways to invest your money. And they’re more alike than you might think.

When you’re aggressively trading stocks, you want to find ways to reduce transaction costs like trade commission, and when you’re buying a house, you want to save on realtor commission. And just like a trader wants to find a low-priced stock that has plenty of room to grow, entire real estate empires have been built by buying houses for cash, renovating them, and selling them high.

But playing the stock market takes more strategizing than buying real estate. After all, you can buy and sell a stock in the same day — it’s a much more fluid, fast-moving market.

Generally speaking, there are two kinds of stock traders. The first one believes they have a special insight into the market or a unique trading strategy that gives them an edge. They execute a lot of trades rapidly to take advantage of market fluctuations, and they aren’t afraid of unconventional investments.

The second kind of trader believes there are no secrets, and that everything important about a stock has already been priced in. When they find a stock they believe offers solid value, they buy it and hold onto it — for years, or even decades — and have faith that the market will carry them to the promised land.

This type of strategy is called the “buy and hold” strategy, and if properly used, it can be extremely lucrative.

For example, if you’d figured out in 2002 that caffeinated energy drinks were going to explode in popularity, and put your money into Monster Energy stock, your investment would’ve grown 87,560% over the past two decades.

Still, every investment strategy has its pros and cons, and “buy and hold” is no exception. Let’s look at some of the positives and negatives of buying and holding.

PROS

It’s Simple

Simplicity is one of the highest virtues, and “buy and hold” is elegantly simple. You simply find value, buy in, and let the market deliver profits. Unlike active traders, who are forced to monitor the market hour to hour or even minute to minute, you can check in on your investments once a month or less.

It’s Based on Solid Analysis

Before you buy and hold, you’ll want to research your prospective investment to make sure it’s a good long-term prospect. If your analysis is solid, your investment will be solid. And when you do eventually buy in, you can do so with confidence — and weather the ensuing ups and downs without having second thoughts.

Short-term trading is often less logical. It can be more reactive to market movements and can sometimes resemble gambling.

It Puts You in a Good Tax Situation

Profit from an investment held for less than a year is subject to short-term capital gains tax, while profits from investments held for longer than a year are treated as long-term capital gains. The good news for buy-and-holders? Long-term capital gains are taxed at a more favorable rate than short term capital gains.

It Saves You Money

Trading comes with transaction costs, and the more trades you execute every day, the more those costs add up. If you buy and hold, though, you don’t have to worry about costs like trade commissions eating into your profits.

It’s Less Risky

The term “manager risk” basically describes the risk of human error that’s introduced when you’re actively trading and managing your portfolio. The more trades you execute, the more risk you’ll make a bad decision and cost yourself money.

Buy and hold minimizes manager risk almost down to zero.

CONS

Your Money is Tied Up

The money you invest in those long-term stocks is going to be tied up for the duration of your investment, which could take several years.

If another investment opportunity comes along, you won’t be able to take advantage. If an emergency comes up, and you need to sell off, your long-term gains are now lost.

You Could Miss Out

When the market is volatile, as in the post-2008 bear market, there’s a lot of money to be made by active trading. If your money’s tied up in your “buy and hold” stocks, you may be stuck on the sideline, watching your more aggressive competitors cash in.

You’re Vulnerable to a Correction

Corrections happen every decade or so, which means that the longer you hold onto your investments, the more likely it is you could be stuck in a crash. Of course, no one knows when it’s coming. You can always find analysts swearing the market will never crash again, but it’s a real risk.

There’s Still Risk

Investing is always a risk, and there’s no guarantee your investments will appreciate along with the overall market. Buy-and-hold seems like a very safe investment strategy, and it can definitely be safer than active trading, since you’re avoiding all the variables introduced by frequent buying and selling, and relying on your expert analysis to guide your investments.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the L.A. Times, and more.