26
For Advisor Use Only
March/April
2014
Wealth Management
/ Investments & Research
Members of Generation X are already well into their prime
earning years, and many millennials are just now entering
their 30s. According to Fidelity’s September 2013
Millionaire
Outlook
, investors of these generations have very different
lifestyles and tend to be more aggressive in their approach
to investing compared with their parents and grandparents.
They’re more likely to search off the beaten path and find
investment ideas that touch their everyday lives.
Now more than ever, it’s important to be aware of
emerging investment themes and be able to explain both
the opportunities and inherent risks they present. We all
know how prevalent social media has become, but other
trends such as 3-D printing and the legalization of marijuana
have also piqued the interest of younger investors. Advisors
who can offer insight on these themes may well have an
advantage in recruiting their next generation of clients.
The Marijuana Industry: Investors See Green
Over the past several years, 20 states have legalized
marijuana for medicinal purposes, and studies show that
more and more Americans support legalization, especially
in younger generations (see Figure 1). Washington and
Colorado voters have approved marijuana for recreational
use, and pro-recreational marijuana initiatives are expected
in various other states in 2016.
Whether you agree with legalization or not, the pendulum
is swinging in that direction. A huge factor behind the
push is the amount of money that’s potentially involved.
The National Cannabis Industry Association projects
$400 million in sales in Colorado in 2014, and the national
market could grow to more than $10 billion in five years
if other states legalize marijuana for recreational use. Clearly,
this has the potential to be an incredible growth story. It’s
not often that a product comes to market with a proven
customer base and a very high level of demand. Other
states are likely viewing Colorado as an experiment, and
if all goes well, it could open the floodgates for broader
legalization. Nonetheless, there is still an enormous level
of risk for investors in this industry.
Are the risks too high?
First of all, most marijuana-related
stocks are penny stocks trading in the over-the-counter
market, which is less regulated and highly susceptible to
manipulation. There are virtually no requirements to be
listed on these exchanges, and many of the companies in
this industry have terrible fundamentals: poor management,
high debt, and no cash or earnings to speak of. Some of
them don’t even have SEC filings, so their financials and
revenues are unknown.
Some investors have been throwing money at these stocks
simply because of their connection to marijuana, without
any understanding of the companies’ revenue potential. As
a result, valuations of many of these stocks make absolutely
no sense, and investors need to be careful. On the other
hand, Colorado companies are growing rapidly, and some
are positioning themselves as potential acquisition targets
for firms in other industries, such as tobacco or alcohol.
This could represent an opportunity for investors, but some
of the better, more established companies in the marijuana
industry are still privately held.
Another risk is that cannabis is still illegal at the federal
level. In August of last year, the Justice Department said
it wouldn’t challenge state laws sanctioning medicinal or
recreational use of marijuana as long as drug sales don’t
impede federal enforcement priorities, such as distribution
As the baby boomers enter retirement and
increasingly look to their investments as
a source of income, advisors face a new
challenge: forging relationships with the
next generation of investors.
Investing Themes for the Next Generation
BRIAN MCCORMICK, CIMA®, AND MICHAEL CORNACCHIOLI, CFA®
1969
1980
1991
2002
2013
65 Millennial
(born 1981–2000)
54 Gen X
(born 1965–1980)
50 Boomer
(born 1945–1964)
32 Silent
(born 1925–1945)
14 Greatest
(born before 1925)
70
60
50
40
30
20
10
0
Figure 1. Boomers’ Support for Legalization
Rebounds to 1970s Levels
Source: Pew Research Center, March 17, 2013; 1973–2008 data
from General Social Survey; 1969 and 1972 data from Gallup
