- Market conditions have never been more uncertain
- Investor behavior has never been more erratic
- Most price action is arbitrary – drive by entirely exogenous factors
After a spectacular rise in 2020, investors in psychedelic stocks have been confronted with a much different scenario in early 2021.
There is currently considerable turmoil in global markets. We’ve seen a general pullback in tech stocks and small caps. In the face of these market headwinds, psychedelic stocks have been steadily giving ground.
Cheap stocks in turbulent markets
We know these stocks are now objectively cheap.
Over US$400 million has been added to the balance sheets of these public companies in recent months via new financings. Simultaneously, market caps for these companies have collectively fallen by roughly half.
Meanwhile, as Psychedelic Stock Watch regularly observes, the commercial opportunity in this sector continues to grow and improve in leaps-and-bounds:
- A rapidly worsening Mental Health Crisis, for which psychedelic drugs offer the only hope of a solution
- Psychedelic drug R&D has advanced into many additional areas of research, including some of the largest of all treatment markets
- Individual companies have announced a number of corporate milestones, including new (legal) markets for psychedelics, new deals with major players from Big Pharma, and inclusion in the Russell Indexes
- The movement to reform our archaic drug laws is accelerating
An increasingly exciting investment opportunity. A flood of new capital to back that opportunity. Cheap stocks.
But share prices in recent weeks have continued to go down, not up. Investors who have happily scooped-up bargain-priced stocks are looking at losses, not gains on their “bargains”.
It’s not rational. However, in global markets that have been flooded with oceans of central bank liquidity, we are seeing increasingly large-and-irrational swings in market valuations, increasingly often.
Indeed, many participants in these markets have morphed into crazed gamblers, simply chasing momentum with the current flavor-of-the-week.
For true investors, it presents a dilemma. With price discovery in markets getting steadily worse rather than better, how do investors decide (in particular) when to buy?
Once upon a time, investors in a strong, emerging sector could confidently “load the boat” at times when even the best players in the industry were heavily discounted due to some temporary market turmoil.
Today, with the crazy price action and the increasingly uneven reporting on markets by the mainstream media, investors can no longer afford to behave in such a decisive manner. Markets are no longer displaying “firm bottoms”.
Dollar-cost averaging: an old strategy for new conditions
In these new market conditions, investors may find utility in one of the oldest-and-simplest market strategies: dollar-cost averaging.
For newer investors not familiar with this old strategy, it is a means of being both decisive and cautious with one’s investing.
The premise is elementary. An investor with a certain amount of capital to invest over the course of the year allocates those funds in constant amounts, at regular intervals. An investor with (for example) $12,000 in new capital to invest in a year would invest $1,000 each month – irrespective of the current price action and market conditions.
It was a strategy designed for two scenarios.
- For novice investors, it was seen as a way to build positions without attempting to “time the market”, something that is generally challenging even for expert investors.
- For sophisticated investors, it was a means to continue to build positions when (for whatever reason) market uncertainty made forecasting future price action nearly impossible.
While new investors can continue to utilize this strategy, it’s obviously scenario (2) where market participants may now see a much larger role for dollar-cost averaging in their investing strategy.
Several variables are not only injecting massive uncertainty into markets, but this uncertainty could (will?) persist for many months going forward.
a) The evolution of the COVID-19 pandemic and the increasingly erratic responses of individual governments in addressing this pandemic.
b) Central bank perversion of markets and economies.
b) Central bank perversion of markets and economies.
We’re now being told that COVID-19 has entered its “third wave” of infecting the general population. This is being reported despite the fact that total global cases of COVID (including those completely cured) amount to only roughly 1 in 60 people (less than 2%).
Three “waves” of a global “pandemic”, but less than 2% of the overall population has been infected? The numbers don’t add up.
In short, what our governments are doing in response to COVID-19 seems to have very little correlation with what is actually happening with virus transmission. That’s a pretty frightening “variable” for investors to have to deal with – as our economies unravel before our eyes.
Then there is the even more-frightening variable.
The world’s central banks (and particularly Western central banks) have embarked upon totally unprecedented acts of monetary extremism.
- Hyperinflationary currency creation
- “Negative” interest rates (i.e. borrowers legally stealing from lenders)
- Massive “asset purchases”
Consequently, market prices today have much more to do with the direction in which central banks are swinging their monetary sledgehammers than do actual economic fundamentals.
Want to try to “time” markets, with prices now almost totally arbitrary?
Want to try to predict future price action when (seemingly) both the politicians and central bankers have lost their minds?
Dollar-cost averaging removes the fiction that we can achieve optimum returns on our portfolios by applying rational investing decisions to increasingly irrational markets.
With it no longer being possible to identify “the right time” to invest, we simply allocate our capital to markets in even increments. But this doesn’t mean that such investing is totally mindless.
Intelligent dollar-cost averaging
Investing even increments of capital (over time) by no means implies investing these sums in fixed ratios, spread across one’s basket of stocks.
Industry leader, Compass Pathways (US:CMPS) has been under pressure recently due to the lock-up expiry of the shares purchased in its IPO financing. It’s a temporary overhang for the stock, so for believers in Compass’ potential, now might be the right time to focus new dollars into CMPS.
The other industry leader, MindMed Inc (CAN:MMED / US:MMEDF) has also seen its stock under significant pressure recently. Investors have been punishing the stock after management recently closed a cheap financing – priced more than 25% below the previous financing.
Only a relatively small number of units were sold in the financing, so the dilutive impact is not that severe. Investors with confidence in MindMed may choose to make this stock the destination for this month’s increment of new capital.
As Psychedelic Stock Watch recently observed, other public companies in this space are trading at absurdly low cash-to-market-cap ratios. There are plenty of attractive targets upon which investors can focus their new investment capital.
For reasons already noted, it’s virtually impossible today for investors to correctly identify “the right time” to buy stocks. But they can still apply their due diligence to decide which stock(s) they should be buying at any given time.
If an investor adds what he/she sees as the best bargain in psychedelic stocks each month, there is plenty of reason for optimism in the long-term performance of such a strategy – even in today’s crazy markets.
We can apply this investing strategy in reverse, when central bank “liquidity injections” inevitably spark the next market spiral: dollar-cost averaging in our selling.
When stocks go vertical in these conditions, when is the best time to sell? No one knows.
So sell a fixed dollar-amount of winners at regular intervals. Investors take profits in holdings where they have become especially overweight or have simply seen the largest gains.
Just because markets are crazy does not mean that we have to drive ourselves crazy attempting to perfectly time our buying and selling. Nor does it mean we have to be a deer-in-the-headlights – afraid to be a buyer or a seller.
Accept that we can no longer know the perfect time to buy or sell. Focus your energies on due diligence, rather than absorbing increasingly vacuous and irrelevant “technical analysis”, in a futile attempt to predict arbitrary moves in markets.
Dollar-cost averaging. An old strategy for a new era. An old strategy for a new opportunity.
DISCLOSURE: The writer holds share in MindMed Inc.