Dave Gilreath, CFP

What do the cannabis and 5G industries have in common? A similar path of investment through Real Estate Investment Trusts. 

What does marijuana have in common with 5G wireless technology? More than you might think at first glance.

As more states legalize medical and recreational cannabis, dispensaries and retailers are growing and support industries are sprouting up. As of early May, 

33 states and D.C. had legalized possession for medical use, and 10  states and D.C. for recreational use.

 And this state-legal market keeps growing; legislatures of several states have legalization bills pending.

Meanwhile, the race to commercialize 5G is on as major carriers’ position for the lucrative market that the new technology will create.

In both industries, investors would probably be better off focusing on something that companies can’t survive without— infrastructure. There are precious few publicly accessible players in this specialized space, and those that exist now have an overwhelming competitive advantage.

provide about 20 times the speed of 4g and improve reliability

, but requires far more relay points than 4G because its signal has a much shorter range. To carry the 5G signal, networks will need more conventional towers and a multitude of much smaller towers needed to fill in transmission gaps. The obvious solution is to build more towers, but this will be difficult because of public opposition. 5G will require 

hundreds of thousands of the smaller towers

, and plans to erect them on municipal property are encountering public opposition.

As a result, companies that currently own or control significant numbers of towers—and, just as critically, are skilled in the nuances of getting government approvals for new ones-- are well positioned. Some of these tower companies are 

—commercial real estate portfolios that investors access through securities exchanges as equities. REITs’ regulatory status requires that 90% of the profits to be passed along to shareholders as dividends, and entities structured as REITs tend to pay higher dividends than other types of equities. Making well-performing REITs tend to be a good income-producing addition to portfolios.

Normally, the vexing issue for investors would be how to select the right tower REITs to invest in. But only several REITs fall into this category (out of only 225 of all types that trade on major U.S. stock exchanges). Two of these—American Tower and Crown Castle&mdash;tend to dominate discussions of REITs in this space. Crown Castle (CCI) has a healthy 

 (the ratio of dividends to price per share) of 3.6%. The annual dividend recently went up 15%, after significant increases over the past three years, and likely will get additional juice from the international market (including unwired nations), where American 4G providers have done well.

The global market is no less an advantage for American Tower (AMT), a larger fund that raised its dividend roughly 20% in 2016, 2017 and 2018, though its current dividend yield of about 1.9% is nearly half of Crown Castle’s. This year, as investors have seen the potential for 5G, Crown Castle has appreciated about 20% and American Tower nearly 30%.

Investors can take the same approach to the burgeoning cannabis industry by identifying the right greenhouse REITs. This is ridiculously easy because there’s only one. Innovative Industrial Properties (IIPR) has the competitive distinction of being the only marijuana-related REIT because it was the only one approved by the Securities and Exchange Commission before the Trump administration put the kibosh on such approvals for the cannabis industry. Thus, Innovative Industrial will probably be the only such REIT at least until a new president takes office.

This unique status has led to meteoric earnings growth and resultant dividends, which increased 118% in 2018.  Shares have increased nearly 80% this year.

And as more states legalize marijuana, more producers needing greenhouse space will go into business. Innovative Industrial has competitors for investment, but these entities aren’t REITS. Instead, they tend to be private equity funds, accessible to only by institutions and extremely wealthy individuals.

The company buys marijuana producers’ greenhouses and then leases this property back to them. For example, if a marijuana producer has a $10 million investment in greenhouses and it signs up with Innovative Industrial, it can get this $10 million back and use it as capital to meet other needs. And freeing up cash is extremely important in this cash-intensive industry, which can’t get loans or even checking accounts from banks, though 

a majority of state attorneys general have asked

 Congress to allow the industry access to federally-insured banks. (Producers and outlets deal strictly in cash; they have huge safes.)

And therein lies the regulatory risk of investing in marijuana, even indirectly. Under federal law, marijuana remains a Schedule 1 drug, meaning it has no medical use and a high potential for abuse.

Yet, in a hopeful sign for advocates of federal legalization, the spending bill recently adopted by Congress includes a 

bar on the Department of Justice’s using federal funds to interfere with state-legal cannabis

Still, absent any changes in federal drug laws, the FBI conceivably could someday bust players, effectively shutting the industry down. But as more states legalize marijuana in some form, intervention seems less and less likely for political reasons. And even if this did happen, it would seem more likely for recreational marijuana than for medical.  Notably, Innovative Industrial’s website touts the company as “the leading provider of real estate capital for the medical-use cannabis industry.”

REITs fall into a category known as alternative investments, which to say they’re an alternative to stocks and bonds (known as traditional investments). Most financial planners recommend that individuals own a small percentage of their total portfolio in alternative investments, perhaps including REITs, for diversification purposes.

However, investors who aren’t slaves to their advisors’ recommended asset allocations might want to consider more opportunistic investment to take advantage of the rare opportunities fueled by America’s new state-legal freedom to use marijuana and the planet’s obsession with faster download speeds.  

For more personal finance insight read on 

heaff Gilreath, CFP® a 36-year veteran of the financial service industry, established 

, a portfolio management company based in Indianapolis, with partner Ron Brock in 2001. The firm now has more than $1 billion under management.

This article originally appeared in our sister site Physician’s Money Digest

“Investing in Two Kinds of Buzz: Cannabis and 5G”

Articles

Investing in cannabis and 5G may seem like two far-flung things that don't belong together in the same portfolio. But the two industries have a surprising connection that makes investing in them a potential reward.

Investing in Two Kinds of Buzz: Cannabis and 5G

Disarray around the globe might often signal a declining market, but that isn't always the case.

Sometimes, what most people think is good for markets isn’t, and what they think is bad for them is actually good.

A domestic example lies in the recent figures on consumer sentiment, showing 

. This is the kind of statistic that tends to prompt market optimism. This is curious because upward domestic markets historically haven’t always followed upward consumer sentiment.

Financial media sometimes gets investors all worked up about the presumed benefits of consumer optimism to the stock market. Yet, contrary to popular belief, higher consumer sentiment is, by some measures, linked 

. Low consumer confidence has historically preceded higher stock market returns, making it a contrarian indicator.  

However, anyone predicting a strong domestic stock market over the next year or two will probably end up being right--for reasons having nothing to do with consumer sentiment.

This potential opportunity is largely because of a global scenario that may seem negative for US markets in the short run but might actually help them long term. People are worried about the impact of the tariff war with China on the U.S. economy (and hence the markets) but in the scheme of things, this disruption’s impact on China can actually benefit American stocks. As well as, the current political instability in Europe. This global tumult will mean that foreign money will continue to pour into US markets because it doesn’t have a better place to go.

A closer look at underlying causes of the tariff war with China—which has underlying issues that generally have bipartisan consensus, so the election won’t completely change the US position&mdash;reveals it’s really not so much about trade as it’s about national security. At its core is Huawei, the Chinese mobile phone manufacturer that, American intelligence agencies suspects, engineers phones to 

. Following this determination was a federal ban on importing these phones, throwing a monkey-wrench into Huawei’s plans for market dominance in the coming 5G wireless era. By enacting this ban, the U.S. is indirectly disrupting a key part of China’s global trade plans as they involve 5G and Huawei in a big way.

 and tariffs have become the US government’s counter-weapon in this trans-Pacific tit-for-tat match. Generally, trade with China has a much smaller impact on our economy than most investors think. The impact of the day-to-day volleys in the tariff war on US markets would be less impactful if more people were aware how little we sell to China: annually, about $200 billion worth—less than one percent of our total economy. Yet some keen observers believe that China wants the trade war because it could provide a 

convenient opportunity to devalue its currency

, a move that would ease the pressure of the nation’s massive debt overhang.

China’s massive debt could eventually bring deep recession to the world’s second-largest economy. This aside, there are other reasons to doubt its long-term prosperity. Decades of meteoric growth have brought a higher standard of living and increased wages, resulting in higher costs for manufacturing goods for Americans. These higher costs are already sending this manufacturing to poorer places, such as India, now the world’s fifth largest economy, with a population is nearly as great as China’s.

India is the world’s largest democracy--a positive growth factor, in contrast with China, whose Communism surveillance and oppression of individuals and limitations on personal freedom (get a jaywalking ticket there, and you literally lose freedom points) is viewed by some experts as likely to increasingly stifle worker spirit; capitalism flourishes best in democracies. In addition, China has increasing global trust issues stemming from systematic and government-sanctions copyright violations. All these factors point a tapering of the global dominance of the world’s second largest economy and decreasingly attractive markets there.

Europe also has its troubles. The pro-populist outcomes of recent elections have weakened pro-European Union parties, creating doubt the union’s stability and the health of European markets. The United Kingdom is in dissary over Brexit and no matter how they exit the European Union, the likely impact on its economy will be profoundly negative. Further, with the exit of Chancellor Angela Merkel, the future of Germany’s economy comes into question, and France is also rife with social divisions. So, there are serious troubles affecting economies and markets in the 

world’s seventh, fourth and sixth largest economies

Meanwhile, bond rates have been declining in 

 (the third largest economy) and actually inverting in 

Europe (where bond investors actually pay companies to lend them money

), making the rates of bonds from domestic issuers attractive and the US stock market even more favorable by comparison. Foreign investment money keeps coming here, so US markets keep chugging along.

There are those who worry about the end of a record business cycle—as though there were any significant data pointing to this (there isn’t) or there were some kind of time limit on expansion (there isn’t). But the factors we 

 know about all point to market growth. Not that this upward ride will be steady. The market will likely remain choppy throughout the summer, which can create buying opportunities for the faithful.

The reigning perception is that many of these dips are being caused by trade tensions and indeed, the two coincide. But the real reason for the dips is that uncertainty amid a tariff war is suppressing corporate growth—temporarily. Companies can’t make expansion plans when they don’t know what the trade rules will be. So, they’re hoarding their expansion cash. When the trade tensions ease, this pent-up expansion demand will likely let loose, driving the market even more.  

But even without this, 2019 estimates forecasts call for good earnings, and stock values tend to march in lockstep with earnings. This growth should continue, however haltingly, for the next year or two. Along the way, I believe the Dow Jones Industrial Average could reach 30,000 sometime in 2020.

For more personal finance insights, read on 

, a portfolio management company based in Indianapolis, with partner Ron Brock in 2001. The firm has more than $1 billion under management.

Tumultuous situations around the globe often lead to negative views on where the market is heading, but not every headline is a disaster for the market. 

How Global Tumult Might Help US Markets

Getting lost in the paranoia of a potential downturn is easy to do, but it's even easier to avoid the negativity and find opportunity. 

The recession that’s supposedly around the corner could be called apocalyptic because it’s always imminent but has a habit of not arriving. Many investors and analysts have been speaking for months as though recession were certain any day. And as the ensuing months have proved them wrong, they’ve sustained their belief by reading all tea leaves to predict recession soon.

At the same time, many investors are extremely nervous about the length of this bull market, now a decade old. Apparently, believing that bull markets have some sort of stamped shelf life, jittery investors don’t seem to think causal factors have anything to do with the end of a bull. But historically, bulls haven’t died from old age, but from endogenous factors.

Those looking for causation find it in the belief that the economy will soon recess, but they’re apparently conflating the market with the economy. Though poor earnings can pummel markets, this conflation ignores examples of the economy and the market acting independently. After all, the current bull started in 2009 and grew apace as the economy wallowed in a recession so deep that it came damn close to depression.   

However, as the two are sometimes related, let’s examine why the R-word is on the tongues of so many market watchers these days.

There are currently some signs of near-term slowing of the economy, but just as many, and perhaps more significant, indicators that a recession starting this year is highly unlikely.  

Many who believe the opposite point to the flattening of the bond yield curve—the zeroing out of the spread between interest rates of long-term and shorter-term bonds, which we’ll call the long-term curve. This flattening is widely believed to presage recession.

Though nobody listened, the Fed told us in June that this curve is not as predictive as another, shorter-term curve known as the near-term forward spread. The Fed posted extensive data on this and explained it in detail on its website, showing how this curve was showing 

no signs of recession for the ensuing year

--and it hasn’t since, arguing well for the rest of 2019.  

Worse than the flattening of this curve, goes the logic, is its inversion, which happened for a few days before a strong jobs report drove the inversion 

 away. Market-watchers caught up in the popular faith in the long-term curve’s predictive powers, obligingly nurtured by media outlets on an almost countdown to recession, might have eased their agita by noticing contrary indications that this same curve was giving. One of these involved lead times between flattening or inversions and recessions.

, "prior to the last seven recessions, the yield curve inverted with a lead time of 55 weeks on average, with a high of 77 weeks and a low of 40 weeks.” Even if you regard this traditional curve as a Delphic like oracle, it was clear that getting white-knuckled over an imminent recession based on it made no sense.

 Curves aside, other misinterpretations involve:

		Overall market performance in 2018. An analysis by Ned Davis Research of the 10 bull markets since WWII found that all had at least one year—and some more—that turned out to be a pause to catch its breath. After these pauses, the next two years delivered great performance, with a total gain for those periods of 53% in the S&P 500. Why couldn’t this happen a tenth time?   

		Misunderstanding cause and effect regarding the global economic slowdown’s relationship with the U.S. economy. There’s a widespread assumption that the global slowdown will take us down with it. Yet, historically, just the opposite has happened. As the world’s largest economy, the U.S. has always led other economies into recession, as it did in 2008.

		The belief that the market is overbought. People have been saying this for years, but all the talk of recession in recent months has lent a sense of urgency to it. This is urgency without accuracy. This year, the market’s average forward price/earnings ratio (based on expected earnings) is 16 times earnings. If this is overbought, then the market has always been overbought because 16 has been the average forward P/E over the entire recorded history of the market, since 1923. 

Meanwhile, those expecting the market to crash may not be considering:

		The upside potential of the pending China trade deal, which may lead to increased business, consumer confidence and higher gross domestic product (GPD) figures for both the U.S. and China, pushing up investment.

		The disparity between growth of the S&P 500 and its earnings. Earnings are 20% higher than they were at this time last year, but the index is up only 8%. Thus, stocks may have some pent-up growth that could be unleashed through P/E expansion.

		The history of market performance at this point in the Congressional election cycle. The S&P 500 hasn’t fallen overall in the 12-month period following a mid-term Congressional election since 1946, and between 1950 and 2014, it delivered gains during this period averaging 15.3%.

		The behavior of the S&P 500 during the last half of a presidential term. Since WWII, no recessions have started during the third year of a POTUS term, and few in the fourth year. This time around, the third presidential year has seen the S&P 500 basically following the historical pattern, marked by a strong start. If true to pattern, the market will soon take a pause to refresh and then resume growing.

		The significance of the past few months. Historically, a good start to the year—and we’ve had one in 2019—has usually led to a good year overall.  

Of course, a real bear market will come eventually. We had a multi-week correction (a rapid decline of 10 percent or more) late last year, and we’ll probably have another in the coming months, or at least a pullback. This course would be consistent with current forecasts of weak near-term corporate numbers. For some large companies, analysts are predicting the first year-over-year quarterly profit declines since 2016.

But this weakness could be short-lived. The real question is: When cometh an actual bear--one that will dig into its lair for some good REM sleep?

The current recession obsession is like someone seeing a physician about symptoms they think are fatal and, upon learning that the symptoms are trivial, asking the physician: “You mean I’m not going to die?” The physician replies: “Not from this.”

Like the life you enjoy while you can, investing is about making money while you can. Sure, it makes sense to maintain a diversified portfolio to protect yourself from the eventual bear. But if you retrench completely and go to cash today out of groundless fears, you could miss out on significant gains, if history is any guide.

These overall gains wouldn’t come without significant volatility which, though widely feared, is actually an opportunity to buy on dips. (As many dips last only a day or two, the key is to be ready by determining in advance which stocks you’d like to own at lower prices.) Volatility opportunities can also be exploited with 

Dave Gilreath, CFP® a 36-year veteran of the financial service industry, established 

It's easy to fear the end is coming. It's harder to find the truth amidst panic. Here's what to look out for to assure the recession isn't on the way.

Factors Investors That Fear Recession Markets Ignore

Volatility is often confused with risk, when in actuality it could be just the opportunity you need to grow your investments.

Ever notice the cold difference between the actual temperature and the wind chill temperature? Wind makes a big difference in the temperature we feel.  

Just as there’s almost always some degree of wind in the atmosphere, there’s almost always some degree of volatility (short-term up or down movement) in the stock market. Although volatility is an inherent performance factor many people have an irrational fear of it, as though it weren’t a constant.  

Many in the investment industry equate volatility with risk, but it’s really a natural part of the market, as is clear from 

data that illustrates the market’s long history.  

Risk isn’t what’s always happening, but what might happen. So equating volatility with risk doesn’t work.

Yet this isn’t what they teach in business schools, where “volatility is almost universally used as a proxy for risk,” Warren Buffet has explained. “Though this pedagogic assumption makes it easy for easy teaching, it is dead wrong: Volatility is far from synonymous with risk.” Instead of being represented by volatility, true risk is the chance of permanent loss of capital.

If your shares of shares of P.J. Widget & Co. have a net gain of 50% for over five years—a period during which they fluctuated wildly in value—that’s a pretty good long-term return. If you sold stock during an extreme dip during that period, this would be another matter entirely. But over the long term, these widgets were a good investment. Thus, volatility is really just a proxy for potential losses over the short term—but not for long-term risk.

For the long term, volatility can be an investing opportunity, so much so that some experts, including Goldman Sachs as early as 2007, have started to view it as a conceptual asset class. And like any other asset class, volatility can be leveraged for gain.

The best way to do this is to use something else that many individual investors irrationally fear: 

, contracts that give the buyer the right to buy or sell the underlying stock at a price agreed to in advance within a certain period of time. Individuals think of options as too complicated and too risky. And sure, some high-flying professional traders use them largely for speculation. But they’re also a way to profit incrementally over time from volatility.

Granted, understanding options requires individual investors to rearrange some mental furniture because many find them counter-intuitive. Most people’s market orientations center on rising values, whereas options involve seeking gains from stocks that rise or fall in value or stay the same price.

Options strategies can be likened to owning an 

. You probably spend several thousand dollars on insurance premiums for your home, knowing there’s less than a 1% chance that you’ll ever file a claim; this is how insurance companies profit. By selling options you can collect premium and seek profits over time.

A sensible way for individual investors to do this is to use options on volatility as a side-income producer, ancillary to returns from underlying assets, bringing limited return but with limited risk. This can involve exploiting the market as we have historically known it by systematically selling options to harness the volatility of a market index. This way, over the long term, you get the gains based on the fluctuations of that index. And, based on a century of market index performance, the longer this strategy is employed, the lower risk of permanent loss of capital becomes.

To get a real-world, objective look at the potential gains from this kind of investment over the long term, my firm conducted a comprehensive back-test study to examine the historical returns that would have resulted from an options overlay strategy—investing in a large-cap index fund and simultaneously employing an option overlay on that index’s performance.  

The test results showed that this strategy would have yielded significant benefits, producing a total hypothetical return of 1,183% over a 26-year period, versus about 782% from investing in the index fund, without using options. Thus, strategic investments anticipating significant downward fluctuations in the index over the short term were more than compensated for by those anticipating upward spikes.

During various short-term periods during the 26 years under examination, liquidating would have produced a significant loss, but staying invested for the long haul averaged out losses and gains to produce highly positive net result. As a long-term asset, volatility “paid off” handsomely.

The isn’t a trading strategy—that is, it doesn’t seek returns from attempting to predict the direction of the underlying index, so it doesn’t involve speculation. Rather, it’s a strategy designed to capture income from options by harnessing volatility -- exploiting its inevitable ups and downs over the long term, while simultaneously protecting against catastrophic loss from the index (with the market) cratering. So, it involves an insurance component.

To be successful, this strategy requires investors to have:  

		An upward bias—an unwavering belief that the market will grow over decades or, at least, maintain its worth.

		A long-term commitment. Years with poor returns should be expected, so abandoning the strategy prematurely may mean forfeiting the opportunity for compensatory gains. If clients throw in the towel in the wrong year—typically, when asset prices are declining—this could significantly damage long-term average returns. Thus, the highest potential goes to the committed, as success hinges having faith and remaining confident during down years.

		Perennial patience. This is a strategy for long-distance runners, for tortoises rather than hares. The impatient shouldn’t attempt it because being advised not to sell prematurely will likely make them uncomfortable. (Truly successful strategies tend to be those that investors not only profit from but can also live with along the way.)

The strategy’s rationale reflects the time-honored investing maxim that plans designed to get rich slowly, through incremental gains, are superior to get-rich-quick plans that often involve much higher risk. Long-term options strategies can prove viable by exploiting the newly-recognized asset class that many investors confuse with risk itself: volatility.

Dave Sheaff Gilreath, CFP® a 36-year veteran of the financial service industry, established Sheaff Brock Investment Advisors LLC, a portfolio management company based in Indianapolis, with partner Ron Brock in 2001. The firm has more than $1 billion under management.

Volatility should be looked at as a natural extension of the market instead of a major risk. And if you look at it calmly, a long-term strategy can help you find opportunity within it.   