We’re all looking for great businesses to invest in. Those companies that seem to defy the natural order; that succeed in industries or sectors where others quite simply, don’t. They each have a difference, an advantage over their competitors which is quite often something so simple that it leaves others wondering why they hadn’t thought of it themselves.
It doesn’t sound like rocket science, but often, that’s just what it is; a combination of lots of little things producing results that defy the incremental benefits. Often the results are non-linear; one plus one equals more than two. It’s something Charlie Munger refers to as Lollapalooza effects.
“Really big effects, lollapalooza effects, will often come only from large combinations of factors.” Charlie Munger
A few years ago I met with the CFO of a highly successful national furniture chain. This family business had achieved financial metrics that defied its industry; returns on equity consistently above 50%, gross margins above 60% and payback on new stores of under six months. Quizzing the CFO I asked, “Should the economy turn down, you could always cut margins a little?” To which he replied, “No, you don’t understand how the business works.” Expanding a little further, “The CEO starts with the 60%+ margins and works backwards. That’s the goal. A two hundred dollar chair is a two hundred dollar chair. Price it at two-hundred and fifty dollars and you won’t sell any. The CEO does the buying (how many other furniture store CEO’s do?). The CEO works with the suppliers to deliver that chair at a price that allows a 60%+ margin. It might mean removing the number of buttons, changing the fabric or redesigning the chair a little to get that outcome. It’s not about dropping price.” Wow, I thought to myself, that’s the silver bullet. That’s what makes this business so successful. A few months later I had the opportunity to ask the CEO directly, “What’s the key to success? Is it in the sourcing of product?,” I asked. Expecting confirmation of the silver bullet I’d uncovered, he replied, “yes that’s one thing, but really it’s the fact we do lots of little things a little better.”
This combination of factors often creates an impenetrable barrier for competitors. Polen Capital’s Jeff Mueller touched on this in a recent Columbia Business School podcast:
“There’s this song by Blink 182 called ‘All the Small Things’. For some reason when I think about competitive advantages it pops into my head. The best compounders I’ve studied and the best ones we’ve invested in don’t just have one competitive advantage where you point to it and say ‘yep, that’s it’. They usually have built this mosaic pulling from almost all the competitive advantages; they have networks, and a great culture, and a safe or aspirational brand and also economies of scale. When you get a lot of these working in the same direction it makes the companies almost impossible to really compete with out in the market place.” Jeff Mueller
Such firms are often more predictable businesses than firms which rely on a single competitive advantage (e.g. a patent).
“There is no a prior reason why a comparative advantage should be one big thing, any more than many smaller things. Indeed an interlocking, self-reinforcing network of small actions may be more successful than one big thing… Firms that have a process to do many things a little better than their rivals may be less risky than firms that do one thing right [e.g. develop/own a patent] because their future success is more predictable. They are simply harder to beat. And if they’re harder to beat then they may be very valuable businesses indeed.” Nicholas Sleep
In the book, ‘In Search of Excellence – Lessons from America’s Best Run Companies’, McKinsey alumni Thomas Peters & Robert Waterman identified a number of ‘strikingly similar themes’ that characterised the excellent companies they’d researched. It was a combination of these that accounted for the outperformance:
“The most important notion, as we’ve said time and again, is that there aren’t any one or two things that make it all work. [It can be] a dozen factors. And it’s all of them functioning in concert.”
Despite almost four decades passing since the book’s publication, the themes are as relevant today as they were then. Little wonder the book has been accredited by Warren Buffett as, “A landmark book, without question the most important and useful book on what makes organisations effective, ever written.”
I was reminded of this concept recently when reading a Forbes article about an aircraft parts manufacturer called Heico. The title certainly grabbed my attention, ‘The 47,500% Return: Meet The Billionaire Family Behind The Hottest Stock Of The Past 30 Years”. I couldn’t help but notice many of the factors that had surfaced in Thomas Peters & Robert Waterman’s research.
I’ve extracted a selection of the more interesting comments from the Heico article complemented by a few other sources, and where relevant, provided extracts from ‘In Search of Excellence‘ [ISOE].
HEICO: “I mean, it’s hard to envision family businesses that have been this successful for this long.”
ISOE: “Many of the best companies really do view themselves as an extended family.”
Focus on the Customer:
HEICO: “We believe that the customer is the most important person in our overall organization. So we are here to serve the customer. And we pride ourselves on making good profits but not gouging the customer in terms of pricing.”
HEICO: “Our customers are our highest priority. After all, without customers, we have no business.”
ISOE: “Whether bending tin, frying hamburgers, or providing rooms for rent, virtually all of the excellent companies had, it seemed, defined themselves as de facto services businesses. Customers reign supreme.”
Close to The Customer:
HEICO: “Typically, our new products are designed in response to direct customer specifications or requests, not as general concepts offered for sale which we hope will later be purchased. This allows us to have a laser-sharp focus on our exact customer requirements.”
HEICO: “Our approach has been, and will continue to be, to learn from our customers what they need, not to develop products and then try to convince our customers to buy the products.”
ISOE – “The excellent customers are better listeners. They get a benefit from market closeness. Most of the real innovation comes from the market. The best companies are pushed around by their customers and they love it.”
ISOE: “The excellent companies pay close attention to what customers want. From listening. From inviting the customer into the company. The customer is truly in a partnership with the effective companies and vice versa. Successful firms understand user needs better. Successful innovations have fewer problems.”
HEICO: “They have done so by acquiring 78 companies over the years and by pricing their parts cheaply.”
Diversified Products / Customers:
HEICO: “Heico produced nearly 100,000 parts, sold to nearly every major airline in the world, as well as defence customers like the U.S. government.”
HEICO: “The board [of the original Heico company] owned nothing—owned no shares,” recalls Larry. “They weren’t motivated.”
Barriers To Entry:
HEICO: “They found [the after-parts market] to be particularly alluring. Everything needed Federal Aviation Administration approval, which ensured that not every Tom, Dick and Larry could easily enter the industry.”
But Not Too Many Barriers:
HEICO: “Replacement parts weren’t generally patent-protected, so all the Mendelsons had to do was reverse engineer them, then prove to the FAA that they were up to snuff.”
ISOE: “The so-called high tech companies are not, first and foremost, the leaders in technology. They are in high tech businesses, but their main attribute is reliable, high value-added products and services for their customers.”
HEICO: “Among our greatest strengths over the past five decades is our emphasis on building relationships — relationships with team members, customers, suppliers, shareholders and other stakeholders.”
ISOE: “We have a host of big American companies that are doing it right from the standpoint of all their constituents – customers, employees, shareholders, and the public at large. They’ve been doing it right for years.”
Product Quality Critical:
HEICO: “We do a full metallurgical inspection on every single lot of parts we produce. That includes material hardness, grain size, grain-flow structure, coatings. . . . The reason we do it is because we can’t afford to have a failure.”
ISOE: “Raychem sells complicated ‘smart’ electrical connectors… They sell their connectors on the basis of high economic value of the product to the customer… The connectors are a microscopic fraction of the value of the eventual product – for example, large aircraft; therefore , the customer can, in fact, afford to pay a bundle.”
ISOE: “Quality Obsession. Many of our excellent companies are obsessed by service. At least as many act the same way over quality and reliability.”
HEICO: “Lufthansa’s investment in Heico—a tacit stamp of approval.”
Investment in Price-Giveback / ‘Jam Tomorrow’:
HEICO: “As their business gained altitude, Larry insisted they live by a blunt rule: “We don’t try to screw the customer.” Heico keeps its prices locked between a third to a half off what an original manufacturer would charge. Heico’s net margin hovers around 15%. It could be more than that if the Mendelsons pushed harder (and some defense products are more profitable). “They’ve historically been reluctant to print a margin over 20%,” says Hebert, the Canaccord Genuity analyst. “They never want to be perceived as gouging or excessively profiting from their airlines.”
HEICO: “Heico’s low-cost, high reliability solutions save each of our airline partners an average of $25m annually.”
Acquire Cost Conscious Founder Businesses:
HEICO: “The Mendelsons are shrewd buyers themselves, having in 2019 completed seven more acquisitions. They shop for owners or top executives who resemble them. “The companies we buy are very entrepreneurial—entrepreneurs that started years ago, started businesses in their garages,” says Larry. “They started with nothing,” which, he says, means “they watch every nickel.”
ISOE: “A few companies have thrived on growth via acquisition, but via a ‘small is beautiful’ strategy. They don’t believe, apparently, in the oft-cited wisdom that ‘A $500 million acquisition is no tougher to assimilate than a $50 million one, so make one deal instead of ten.”
Proper Incentives / Alignment:
HEICO: “The Mendelsons don’t usually buy an entire firm. More often than not, they leave a fifth of it in the hands of the owners or the chief executives running the place to keep them incentivized.”
Incumbents Won’t Compete:
HEICO: “The Mendelsons have been able to earn a foothold in an industry dominated by the so-called original equipment manufacturers, the GEs and Boeings of the world, who are the first to develop the parts and keep prices high on any replacements to help recoup the original R&D costs.”
HEICO: “One of our key tenets is that we must constantly develop, produce and sell new products to add to our existing product lines. Simply put, we are not interested in having our existing businesses remain static.”
ISOE: “There are some associated rules. For example, each division [at 3M] has an ironclad requirement that at least 25 percent of sales must be derived from products that did not exist five years ago.”
Stick to the Knitting:
HEICO: “It wasn’t long before they were casting about for similar opportunities in the after-parts market, which they found to be particularly alluring.”
ISOE: “Our principal finding is clear and simple. Organisations that do branch out (whether by acquisition or internal diversification) but stick very close to their knitting outperform the others.”
ISOE: “Acquisitions followed a simple rule. They have been small businesses that could be readily assimilated without changing the character of the acquiring organization. And small enough so that if there is a failure, the company can divest or write it off without substantial financial damage.”
Decentralise / Autonomy
HEICO: “As long as you do what you say you’re going to do, they”—the Mendelsons—“leave you alone,” Barnes says. “And they ask, ‘Do you need anything?’”
HEICO: “We understand that entrepreneurs have unique skills and that they focus on their businesses in critical ways; we generally go to great lengths to avoid losing that. This entails greater autonomy for the businesses than many large companies are willing to give, and an aversion to consolidating acquired companies, but we are committed to this model.”
ISOE: “If the manager of a business can control all aspects of his business it will run a lot better. We believe a lot of the efficiencies you are supposed to get from economies of scale are not real at all. They are elusive.”
ISOE: Regardless of industry or apparent scale needs, virtually all of the companies we talked to placed high value on pushing authority far down the line, and on preserving and maximising practical autonomy for large numbers of people.”
HEICO: “We feel very good about the way that we are taking care of our team members. Some organisations say their people are employees; we prefer to say team members.”
ISOE: “Most impressive of all the language characteristics in the excellent companies are the phrases that upgrade the status of the individual employee. Again, we know it sounds corny, but words like Associate (Wal-mart), Crew Member (McDonald’s) and Cast Member (Disney) describe the very special importance of individuals in the excellent companies.”
ISOE: “Treating people – not money, machines, or minds – as the natural resource may be the key to it all.”
HEICO: “The Mendelsons have long encouraged their employees to take advantage of a lucrative retirement plan. They match up to 5% of what workers sock away in their 401(k)s—not in cash but in Heico stock. So, put in $5,000, get $5,000 worth of Heico shares, which, of course, have done nothing in the past 29 years but wildly appreciate. In other words, the stock has turned a lot of ordinary Heiconians, especially early staffers, into millionaires. No, that’s incorrect, Larry says. “Multimillionaires.”
HEICO: “The people who work in the company: the machine operators, the secretary, shipping clerks, floor sweepers, cleaning people – anybody associated with HEICO who is on the payroll, is eligible for that 5% match.”
HEICO: “Our corporate head office consists of only six people.”
ISOE: “Top level staffs are lean; it is not uncommon to find corporate staff of fewer than 100 people running multi-billion dollar enterprises.”
There’s a plethora of useful mental models in the above:
Industry Structure [Incumbents don’t discount to recoup R&D] / Small Cost of Product vs Total Cost / Fragmented Customers / Fragmented Products / Mission Critical – Quality Products / Barrier to Entry [ie FAA Approval] / Reputational Advantage / Pricing Power / Investment-in-Price-Giveback / Decentralisation – Autonomy / Innovation / Close To The Customer / Encourage Ownership / Sensible – Smaller Acquisitions / Aligned Management / Minimal Headquarters – Valued Staff
These attributes together create a formidable ‘Barrier to Entry’ for Heico.
Perhaps, unsurprisingly, you’ll notice that many of the same attributes above are also evident in the great companies covered in these pages before. The majority of these are qualitative in nature – you won’t find them in a spreadsheet.
“Economists talk about ‘barriers to entry‘, what it takes to compete in an industry. As is so often the case, the rational model leads us to get ‘hard’ and ‘soft’ mixed up on this one, too. We usually think of principal barriers to entry as concrete and metal. – the investment cost of building the bellwether plant capacity addition. We have come to think, on the basis of the excellent companies data however, that that’s usually dead wrong. The real barrier to entry are the 75-year investment in getting hundreds of thousands to live service, quality, and customer problem solving at IBM, or the 150-year investment in quality at P&G. These are the truly insuperable ‘barriers to entry‘,’ based on people capital tied up in ironclad traditions of service, reliability, and quality.” ISOE
While we haven’t covered all the useful mental models from ‘In Search of Excellence’ we’ve ticked off a lot of them. By studying the characteristics that have made businesses excellent, we can then search these out in other potential investments. When a multitude of factors create an impenetrable barrier, a Lollapalooza effect could be in the making – but don’t just look for that single silver bullet; it might just be made up by a lot of little things.
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Title: Lollapalooza Time
Sourced From: www.vintagevalueinvesting.com/lollapalooza-time/?utm_source=rss&utm_medium=rss&utm_campaign=lollapalooza-time
Published Date: Tue, 19 May 2020 06:34:40 +0000
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Are These Marijuana Stocks Built For Long Or Short Term Success?
Would You Invest In These Marijuana Stocks In 2021?
For the last several month’s investors have found a renewed interest in marijuana stocks. From mid-2020 to currently in 2021 cannabis stocks have been on the move. Many pot stocks from various niches have been rising in the market. Some marijuana stocks have not only reported record earnings but some have seen back-to-back all-time highs. With the amount of money being invested with the hopes of federal cannabis reform, people are trying to jump on board before the boat leaves the dock.
The cannabis sector as a whole has been on fire. Many companies in the cannabis industry have been preparing for what’s next to come. Meaning most cannabis companies are making operational adjustments to be able to adapt to the future of the cannabis industry. For example, 2 big-time cannabis companies both teamed up to make the biggest cannabis company on earth. Tilray Inc. and Aphria Inc. joined forces which have helped both companies market performance to a degree.
As well other companies have taken notice and may follow the same path. A lot is changing for the cannabis industry between legislation, more states going legal, and new regulations. All these variables play a factor in how this sentiment impacts the market. With more positive sentiment taking hold of the market is reflects in how well some marijuana stocks trade.
So far in 2021 cannabis stocks are moving up and seeing overall bigger gains. For this reason, many new and seasoned investors are looking to get involved and make some money. The cannabis industry is one of the fastest-growing markets in the world that is continuously expanding. The 2 cannabis stocks below are examples of when the sector is trending it resonates well with how marijuana stocks can or will trade.
Pot Stock Watch List This Month
Green Lane Holdigns Inc.
Green Lane Holdigns Inc. has been of the many marijuana stocks trying to climb higher in a volatile market. Back in 202 GNLN stock saw its price fluctuate quite often. This price fluctuation allowed for good entry points before GNLN stock had a spike in trading. Like many marijuana stocks, 2021 gave the cannabis market a nice push to start the new year. With Green Lane 2021 was no different.
In the first 2 weeks of the new year, GNLN stock shot up 25 percent in trading as it was starting to dip from this point. Even though Green Lane closed out the first month of the new year with a drop from previous highs in January the following month was a different story. Currently GNLN stock in February has been able to recover from January’s dip.
The company has been able to even reach higher highs than last month. Within the first trading week of February, GNLN stock saw gains of 27 percent. This was a much-needed momentum booster to help the company recover from its trading at the close of January. So far for in February GNLN stock has had a nice upward push in the market showing over 60 percent gains in trading. This current momentum has signaled to investors that Green Lane may be a marijuana stock to watch in 2021.
- 3 Top Marijuana Stocks To Watch This Year
- Will Cannabis Stocks See A Rise In Trading With Chuck Schumer Push For Federal Cannabis Legislation?
Liberty Health Sciences Inc.
Liberty Health Sciences Inc. has been an interesting cannabis stock to watch. Like many other cannabis businesses, it’s going to take more than a pandemic to stop the company from expanding. Back in January, the company announced that it will be opening a new location adding to its current portfolio of dispensaries. The Company plans to open two more dispensaries by the end of February 2021 with much more in the works.
Although in 2020 LHSIF stock traded mostly sideways with subtle spikes in trading the new year has provided a strong push in trading. Starting from December 21st LHSIF stock started to bounce and began to climb in the market. From the 21st to the 31st of December LHSIF stock shot up 90 percent. For those who held their position until this point, they made a healthy return on their investment. Pushing into the new year the company was able to sustain its market momentum and keep pushing up in the market.
In the first 14 days of trading of the new year LHSIF stock has a 13 percent increase in trading. The remainder of January’s trading resulted in a small dip. Yet overall gains for the first month of 2021 for LHSIF stock was an increase of 8 percent. This was a subtle push that helped the company sustain its current market position. Now that we have entered February LHSIF has continued to trade up in the market. Currently for the month of February LHSIF stock is up over 25 percent. If the company can continue this momentum it would intrigue more people to keep an eye on this marijuana stock.
By: Daniel Chase
Title: Are These Marijuana Stocks Built For Long Or Short Term Success?
Sourced From: marijuanastocks.com/are-these-marijuana-stocks-built-for-long-or-short-term-success/
Published Date: Thu, 11 Feb 2021 13:30:07 +0000
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Price to Earnings Ratio Defined (P/E Ratio Formula)
Trying your hand at the stock market? Chances are, you’ve come across the term “P/E ratio”. If you’re like many who are new to the stock market, you’ve looked at this phrase and asked yourself, “What in the world is that?”
P/E ratio, otherwise known as the price-to-earnings ratio, is a formula that investors use to determine the value of a company’s share. It is one of the most common formulas used to determine the value of a stock. The formula compares the price of a company’s share to the earnings per share (EPS) of the company in order to determine how much an investor is paying for $1 of the company’s earnings. Let’s take a deeper dive into the P/E formula. Use the links below to jump ahead to a section of your choosing.
P/E Formula and Calculation
First thing’s first: let’s learn the price to earnings ratio formula and how to calculate it. The price-to-earnings ratio formula is as follows: the price of a single share of a company’s stock (What is a stock?), divided by the company’s earnings per share (EPS). The ratio of these two variables will tell you exactly how much an investor is spending for a single dollar of the company’s earnings.
Finding the cost of a company’s stock is extremely simple. In order to find the price of a single share of a company’s stock, all you need to do is enter the company’s stock ticker symbol (the series of characters that represents that company on the stock market) into a finance website, such as investor.gov. You’ll quickly find the current cost for a single share of that company’s stock. Google also keeps an up-to-date Market Summary for the prior day’s stock market, so a quick Google search will often bring exactly the answer you’re looking for.
Determining a company’s earnings per share (EPS) can be a bit trickier. Earnings per share are broken down into 2 categories: trailing earnings and forward earnings. Trailing earnings, often shortened to TTM, are the company’s core earnings over the trailing, or prior, 12 months. This number is the profit that the company has generated over the past 12 months of business. Remember that we’re talking about the net income of a business, rather than the gross income (Need a refresher? Learn more about gross income vs net income.). P/E ratios calculated with trailing earnings are known as the trailing P/E (P/E TTM). Forward earnings, on the other hand, are the predicted earnings that the company will generate over the next 12 months. P/E ratios calculated using forward earnings are known as the forward P/E. Both types of earnings are divided by the total number of public shares on the market in order to generate their EPS. More on this later.
Let’s try out an example. Say you’re looking to determine the trailing P/E of a fictional company AlphaBet Corporation, known on the stock market as ABC. Their share price is currently at $50 per share. Their trailing earnings per share is $5. Divide the $50 per share by the $5 EPS, and you’re left with a P/E of 10. This means that investors are paying $10 for every $1 in earnings per share.
Understanding P/E Ratio
So, ABC has a P/E of 10. What does that mean for you?
In the most general sense, the lower a P/E ratio, the less an investor is paying for each dollar of a company’s earnings per share. A higher P/E ratio means that an investor is paying more per EPS. But, unfortunately, determining which stock to buy isn’t as simple as “look for the lowest P/E ratio”.
It is imperative to remember that everything on the stock market is relative. “Good” and “bad” numbers are different for each and every industry. An electronics company and an automotive company are functioning in two vastly different landscapes. Therefore, in order to determine what is a good price to earnings ratio, you’ll need to understand the landscape of P/E ratios in the industry. Look at similar companies’ P/E ratios to better understand the relative value of your company’s P/E ratio. If ABC’s price-to-earnings ratio seems extremely high as compared to other companies in the industry, it may be an overvalued stock. On the other hand, if it seems extremely low as compared to other companies in the industry, it may be a very valuable stock.
Let’s try another example. We’ve already determined that ABC’s price is $50 per share, earnings are $5 per share, and P/E is 10. A competitor, DOG, also has stock for $50 per share. Their earnings, on the other hand, are $2 per share, making their PE 25 (50/2=25). An investor would pay $10 for every $1 of ABC’s earnings per share, but they’d have to pay $25 for every $1 of DOG’s earnings per share. With a better understanding of the landscape, we can see how ABC sits relative to its competitors.
A company’s price to earnings ratio may also be looked at relative to itself. Remember those two types of earnings we reviewed earlier? We can compare a company’s trailing P/E to their forward P/E to better understand the value of a stock. A company with a high trailing P/E ratio may have been rather unprofitable the prior 12 months because theywere preparing to ramp up business substantially, and took on a number of upfront costs. They may be expecting a boom of profits over the forward 12 months, leaving them with a substantially lower forward P/E. By reviewing these numbers in comparison to each other, we may see an opportunity for a long-term investment.
Limitations of the P/E Ratio
While the price to earnings ratio is certainly one of the most widely used calculations among stock market investors and analysts, it’s not a cut and dry way to determine a good or bad stock. It gives investors a good understanding of the value of stock in a particular moment, but it certainly has its short-comings.
Just as the stock market is relative, it’s also in a constant state of fluctuation. It is re-evaluated and recalculated constantly. Why does this matter when it comes to the price to earnings ratio? Well, just look at the variables we use to determine the P/E ratio.
First, we have the “price” of the price-to-earnings ratio: the cost of a single share of a company’s stock. Stock prices fluctuate every single day based on supply, demand, current events, and more. Typically, the cost of a company’s stock will be reported as the cost that it was when the stock market closed the prior day. Each time a company’s stock price changes, their P/E ratio will change. Certain companies may tend to have a greater fundamental volatility than others, leaving their stock price changing substantially each and every day. Even those with low fundamental volatility experience routine fluctuation.
Next, we have the “earnings” in the price-to-earnings ratio. Both trailing and forward P/E ratios have their limitations. Trailing P/E can feel like the more reliable of the two numbers because it’s based on facts. We take their actual earnings over the prior 12 months into account. But, in many situations, a company’s prior 12 months may have little to do with their next 12 months. As mentioned earlier, a company may have spent heavy the prior 12 months in preparation to ramp up the next 12 months. The trailing P/E won’t show us any of that. The forward P/E, on the other hand, is based on predictions. And predictions are quite educated guesses, but at the end of the day predictions are still guesses. A company may fall short of their predicted earnings or blow completely past them.
Looking to try your hand at the stock market? Don’t go at it alone. Consider opening an investment account with Mint. We believe that there’s no “one-size-fits-all” approach to investment. That’s why we offer a variety of investment partners, suited to each particular need. Let’s find the best to suit yours.
The post Price to Earnings Ratio Defined (P/E Ratio Formula) appeared first on MintLife Blog.
Title: Price to Earnings Ratio Defined (P/E Ratio Formula)
Sourced From: mint.intuit.com/blog/investing/price-earnings-ratio/
Published Date: Tue, 25 Aug 2020 19:37:02 +0000
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Will Marijuana Banking Be Apart Of Federal Cannabis Reform?
The Cannabis Industry VS Financial Institutions
As marijuana stocks and the cannabis industry as a whole awaits federal cannabis reform the sector keeps trending. Now if the U.S. can federally decriminalize cannabis some analysts feel it may cause some cannabis stocks to rally. As well as many new doors will that can open. For one many new markets will look to join the U.S. cannabis industry. Furthermore, with federal cannabis reform, it could be the start of initiating a banking system for the industry.
Currently due to cannabis still being federally illegal banks can not take money from a cannabis-related business. From the time states started going legal, it has been an issue that has yet to be resolved. The cannabis industry is one of the fastest-growing industries in the world, especially in the United States. Politicians have been working to pass various pieces of cannabis legislation.
The one bill that would be beneficial to the industry is known as the SAFE Banking Act. This bill would allow banks to accept money from cannabis-related businesses. On March 7, 2019, the bill was introduced to the U.S. House of Representatives by Ed Perlmutter and was introduced to the Judiciary and Financial Services Committees. Back in 2019, the Financial Services Committee voted 45 to 15 to advance the bill to the full House.
The SAFE Banking Act provisions were included in the HEROES Act COVID-19 relief bill passed in the U.S. House in May 2020. They were again included in a bill approved by the house 214–207 in October. A push to include the SAFE Banking Act provisions in the end-of-year COVID-19 stimulus failed, though hope remained it could pass in 2021 if reintroduced.
How Will The Cannabis Industry Work With Banks
When it comes to any business you can think having startup capital is important. Now not every person with money is willing to invest in a new venture which makes finding that more of a task. Especially with cannabis-related business and right now banks are no help. For a business to acquire a line of credit or some type of lending your business must be able to have some type of financial record.
This usually tells banks and lenders how good you are at paying things back and how reliable you are to do so. The bigger obstacle for cannabis businesses is how do you show you are trustworthy with no credit history. Once again this due to financial institutions not working with cannabis businesses. Let’s look at a few steps to help jump over some red tape.
First, you should start a new business that is a separate company from your personal credit. This will help when it comes time to do your taxes. The second step to take is you need to register for your EIN number. Next thing to do is open a new bank account and make sure you can show that you have continuous income which shows financial stability. Again with banks not accepting cannabis money the last step may be next to impossible to do.
- Are You Up To Date On The Cannabis Industry In 2021?
- Are These The Best Marijuana Stocks To Buy For Long Term Cannabis Investments?
Will Cannabis Banking Actually Happen?
The way financial institutions offer other industries various banking options is not the same for the cannabis industry. Although there is some grey area with cannabis and banks yet most banks won’t offer services for how high risk the industry is. This leaves many cannabis businesses left out from what other traditional retail businesses would have. Look past the risk banks also look at taking cannabis money as to much work. This would result in following regulations and keeping data on all money. This process has been established by the Bank Secrecy Act of 1970. Also, working with the large amounts of cash cannabis businesses generate may affect how a bank can operate.
With this roadblock between banks and cannabis money, it shuns cannabis businesses from establishing a form of credit. This issue alone is why the industry operates only in cash with very few places to keep it. Also, this issue can do much harm to future relationships with other companies and businesses. If a cannabis business can not establish a credit history no lender or bank can help. That’s why it’s important to have an industry as big as cannabis have some form of credit being reported to credit companies. This will tell other lenders and banks that a particular business is profitable enough to pay back any loans.
What Will The Future Of Cannabis Banking Become
It’s wild to think that an industry that is generating a high volume of cash is being blocked from showing the reliability needed to secure lending. Some feel if the cannabis business can earn the trust of financial institutions by being transparent with its earnings. This may be a step to banks feeling more comfortable with working with a cash-intensive business. Hopefully, with federal cannabis reform, it will help push cannabis banking in the direction needed to help out the industry.
By: J. Phillip
Title: Will Marijuana Banking Be Apart Of Federal Cannabis Reform?
Sourced From: marijuanastocks.com/will-marijuana-banking-be-apart-of-federal-cannabis-reform/
Published Date: Tue, 09 Feb 2021 18:34:56 +0000
NVIDIA GeForce RTX 30 Gaming Laptops Powered Massive Cryptocurrency Mining Farm Spotted in China, Over Hundreds of Ampere Laptops
Intel 3rd Gen Xeon Ice Lake-SP CPU Rumors – 10nm With Up To 40 Cores, 8-Channel DDR4-3200, 64 PCIe Gen 4.0 Lanes, Max 270W TDP
Intel’s Raja Koduri Teases Xe HPG Enthusiast Gaming Graphics Cards In Action Within 3DMark Mesh Shader Test, Launch Imminent?
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