PODCAST: Perils and Profits of Cannabis Investing with Matt Hawkins

photo illustration of money and marijuana leaf

(Image credit: Getty Images)

By Kyle Woodley, Sandra Block, David Muhlbaum

published 2 June 2021

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David Muhlbaum: Okay. Well, over the past year we have cranked out all sorts of content here about unemployment and unemployment benefits because, obviously there was a lot of unemployment. And historically, we paid a lot of attention to unemployment and job creation from this macroeconomic perspective, but this year was obviously much more how-to, here's how you get the benefits, here's how you navigate the system, and here's how you pay taxes on it if you have to.

Sandy Block: Oh, right. Right. No, I never worked at a place that served booze so I only got free milkshakes at the end of my shift and that's not so much fun. But the question is, is the reason that these folks can't hire -- and there really is a problem, I saw a lot of places saying they had to cut back on hours because they didn't have enough people, or were only operating the drive-through window -- is that really because of this extra unemployment benefit? Is $300 a week keeping that many people at home, or are there other factors going on here?

Sandy Block: Right. And again, there's a lot of back and forth on this and it's really not been tested because we don't know what's going to happen. I guess the real test will come in September, when this extra $300 runs out. Is all of a sudden everybody going to go work at fast-food places or are we still going to have a labor shortage because what's also happening here, what we're hearing is that some people are still at home taking care of their kids. Some people don't feel safe going back to work, maybe they didn't get vaccinated, or they don't want to get vaccinated. And in some places, this could be hitting places, where people are realizing, working in a restaurant is a crummy job. You didn't make very much money -- and they are holding out. That actually seems to be working because a lot of places are raising their wages.

David Muhlbaum: Obviously, we're seeing what you're seeing in terms of the signs. I'm seeing it here at my mother's continuing care facility where they are basically putting out apology notes about the food service because they are having a hard time hiring line cooks. But, actually, since I brought that up, it's actually a somewhat odd situation because here at this CCRC, working in food service is really a whole lot different than the restaurant industry that you're referring to. This is normal hours, benefits, actually, frankly, not working for tips. It seems a sort of good place to wait out the pandemic and yet it seems that restaurant owners are at least able to hire away enough of the staff there to make a difference. There are enough people who want to go back to what, maybe I'm calling it the old way, and maybe the money's up.

David Muhlbaum: We are looking for an Assistant Personal Finance Editor. No, seriously. You can help us cover all these crazy times. You could maybe even help on the podcast, if you can talk pretty. And we also need an Associate Investing Editor, someone who really knows ESG, environmental, social, governance factors. It's a close cousin to the green investing that we talked about here a month ago. Both of these positions are on LinkedIn and other sites and I'll put in a link to the show notes.

Kyle Woodley: Hello, hello. Matt's CV now includes being a contributor to Kiplinger. He brings a lot of expertise to our coverage of this still-emerging industry, but I think one of the most important things he has to offer to listeners is, being able to not just give us a fish, but teach us how to fish. That is, he can provide the insight that investors need to evaluate marijuana investments for themselves, just like they would, say consumer staples or tech stocks. I'll admit, I actually learned a lot about what I didn't know about the space in his most recent piece for us, Investing in Cannabis: Beware these Red Flags. I'm really glad you could join us today, Matt.

Matt Hawkins: Absolutely. The thing about the marijuana industry, especially in the United States is that you're dealing with companies that are either listed on the Canadian Securities Exchange or on the smaller exchanges like over the counter. There's no real action on the NASDAQ or New York Stock Exchange, save for a few ETFs and maybe a couple of non-plant-touching companies. And so it's harder to find out research. It's hard to find the research that's out there. Some investment banks that are more boutique in nature provide that kind of coverage, but for the most part, it's not like going to buy Apple. It's a different program.

Matt Hawkins: That's exactly right. And until it becomes either quasi-legal through a variety of legislative initiatives, that's going to be the case. There's a couple of things on the horizon, one being the Safe Banking Act, which has already passed the House I believe three times now. It is in the Senate, and I think once the Senate flipped to the Democrats after the Georgia run-offs, the prospects of that piece of legislation being passed by the Senate went up dramatically.

Matt Hawkins: Totally. And there are some of those stop-gap measures, I think I may or may not have referred to it in the piece, but we like to those companies bandaids. For example, we don't really like to look at alternative banking solutions because I believe they are just bandaids. Once the Safe Banking Act passes, all the big banks are going to want to take deposits. Right now, it's just state charter banks, credit unions, local banks, municipal banks. But the minute BofA can start taking deposits because the federal government lets them, they are going to want to do it. And so all these different mechanisms by which money is being moved or held or whatever the case may be, not only do those business models change, they likely cease to exist.

David Muhlbaum: To step for a moment beyond the immediate legislative outlook of the industry, can we just take a step back to talk about the industry as a whole. We've been talking about red flags, we've been talking about warnings, we've been talking about limited availability of U.S.- traded stocks, but can you just give us some sense of what the big upside is for the marijuana sector? There's a reason you're here, and by that, I don't mean on this podcast; I mean in this sector.

Matt Hawkins: Well, look, I had a luck-in-timing moment back in 2014. I had exited a multi-family play. I had done some private lending in the downturn. I started dabbling in that again and one of the things that I was seeing in 2014, which is when Oregon, Colorado, the State of Washington all went recreational adult-use legal. In Denver, there were warehouse owners looking to refinance their mortgages out of commercial debt into private debt, which would then give them the ability to lease their facilities to growers. They were paying high yields, it was a nice play. You have the security of a first lien on a piece of real property. But my luck-in-timing moment was realizing that if I could somehow figure out how to raise money and underwrite the actual cannabis assets themselves, I would have a first-mover advantage -- and I did.

There was just one or two other groups at the time doing it and we got lucky. We were able to make some big bets in an emerging industry and we've been able to ride that wave, at least initially, and now we've got 68 investments I think to date out of our family of investment vehicles. It's been a good ride, but we're doing it because of what's on the horizon. We won't see anything in our lifetime like an event that brings in this much capital, that can provide a huge boost to the industry and provide returns to early adopters of this sector and that's what we're playing for.

David Muhlbaum: And Form Factory. Now, some of these, or the companies that acquired them, are publicly traded, so for reasons I'm sure you'll appreciate, we're not going to talk about individual cannabis stocks with Matt. But if you, listener, are interested in investing in individual cannabis stocks, fear not, we've got just the thing for you, 10 Best Marijuana Stocks to Buy for 2021 by our contributor Will Ashworth. I'll put in a link to that.

Kyle Woodley: But we do want to ask you about cannabis funds, specifically as they are used as just another tool in the toolbox. When you've got an industry that's still in a great state of flux, that's still finding itself, like the marijuana industry is, many investors are probably going to think to themselves, okay, why don't I just buy a marijuana fund, so that I don't have one big single stock pick that goes the wrong way, it doesn't just completely blow up in my face, blow up my whole portfolio. But do you think that investors clip a lot of that potential in the industry by making such a diversified investment or is there enough ceiling for a slew of stocks to collectively make waves?

Matt Hawkins: Let me just give one disclaimer that most of our investing is obviously on the private side but I think the rule of thumb for being diversified in the cannabis industry applies to both public and private opportunities. On the private side, because of the nascency of this industry, and because of the lack of knowledge of what goes on in a cottage industry like this, you would be wise to invest with someone like us, who knows the industry cold, that's been doing it since 2014. And I think the same thing can be said for the public side, is that if you don't have the ability to diversify yourself on a variety of these, maybe it's the top 10 picks that was just referenced, but if not, then perhaps an ETF is better suited for you.

Kyle Woodley: No. I was just going to follow up on that and just ask, do you have any, out of curiosity, any particular preferred ETFs out there? We talk a lot about the ETFMG Alternative Harvest ETF, that's ticker MJ, which is the largest fund out there by assets and one that a lot of people know. We've actually recommended the AdvisorShares Pure US Cannabis ETF, ticker MSOS, because of its focus on U.S. marijuana stocks versus MJ and others which, they have very distinctly Canadian and international tilts. Are there any funds out there that you look at and you go, this is an interesting way, a distinct way to invest in the cannabis space?

Matt Hawkins: Without giving investing advice, I will say this. We don't look at ETFs, we obviously know the public sector cold. I would say that, because the public sector is our lifeblood, that's where we either sell companies to or we get lucky and do off-market pipes. We know the sea levels of most every important publicly traded company in the United States and so we may be a bit bias, but my opinion is that you'd be much better off looking at an ETF that contains primarily U.S. Assets. And the reason is that the U.S. market is not only the largest cannabis market in the world, but it's about to go through a shift and a paradigm that is like we've never seen before.

Canada has already done that. Canada is already completely legal and the market, God bless 'em, is smaller than the state of California. It's doesn't make much sense, and to me, the Canadian licensed producers have a flawed model, to begin with. Originally they were set up to be the outsource providers to the world, but their cost structure doesn't allow them to do and so a lot of them, Canopy was smart, Canopy tried to get creative with how they could indirectly own U.S. Assets with Acreage and they got ownership in TerrAscend and a few others. But the other licensed producers have been slow to move and so that's problematic.

Matt Hawkins: I knew that when I took the chance in 2014 that it was going to be a huge risk/reward because I thought there could be something like this on the horizon, but I had no way of knowing for sure. And plus, it wasn't easy raising money back then. Hell, I live in Dallas, Texas and so you can imagine how hard it was to raise money back then, just from the conservative nature of our state, but what that moment in time was, is when California went adult-use legal in 2016. When that happened, that changed everything, and the fact that California became the largest market in the world overnight with this election was just downright, not only eye-opening, but it was kind of like, holy crap, this is going to happen. Then we decided to get really smart about where to pour the capital. We spent a conscious effort to spend the next three years investing a fair amount of capital in that state and now we've got a pretty good presence there. We're excited about the prospects.

David Muhlbaum: It's interesting you mentioned the difficulty of raising money back then in Texas. We talked a good bit about federal legislation and as most people know, marijuana's legality varies by state. We have Idaho and Washington next to each other, very different takes on it and that's a reminder that marijuana has a cultural history as an illegal substance. And it's taken a lot of restraint, I haven't made a single wacky weed joke today. We've treated this sector as oil and gas. Now that might be a future illegal substance, but that's another story. But I am curious about whether, as you go about your business, Matt, whether you get pushback or teasing or whatever, like, the Cheech and Chong stuff.

Matt Hawkins: I certainly did for the first three years of doing this. Not only that, but I had people judge me, like what's wrong with you, and thought I was crazy. Now, those same people either want to join our investments or they want to talk about it and laugh about it and sometimes they ask me for product. I'm like, look, I'm not your dealer. But the truth of the matter is, that just points to the stigma is almost 100% gone. There is still a sliver of the far right in the Bible Belt where I live that thinks this is still the gateway drug and that's unfortunate, because we've seen time and time again the medicinal benefits that this product has. But look, it's still a vice product, there's no doubt about it, and there's always going to be some people that say it shouldn't be used and sold.

Matt Hawkins: Sure and what I just said is about as evangelistic as I get when it comes to this because that's not what we do. The last thing that we want to do is try to change people's minds if they are opposed to it. It's just not our job. It's not our position. We've been lucky enough in the course of our period of time where we put capital together that the stigma has been lifted and so like I said, some of the same people that were against it, in the beginning, have become some of our better investors just in the past years.

Matt Hawkins: Exactly, and the same amount of money we have under management would be, if I was just in the lower middle-market PE world, it would be a gnat's eyelash compared to what most of the larger funds manage. But for cannabis, we're one of the largest firms and that's just because of the nature of the world we live in. It's all family offices and high net worth individuals that are putting the capital to work and we're just one of the organized groups doing it.

Kyle Woodley: I can't think of another situation in which so much money was primed to go to work because here, you already know what the product is. The product has been in use for literally centuries. We've just been waiting for the legalization so that it can turn into this actual legal business structure or whatever. But think about any other invention, you had to prove it out to people. Even like the smartphone, we had phones before, but the smartphone, that took some ... We didn't just have iPhones right away, we had the Zack Morris cellphone, first and we made our way along. You had to prove to people, and eventually build up demand from there.

David Muhlbaum: To follow on Kyle's tangent for a moment, it makes me wonder, and I don't know my history here, but it makes me wonder what was the scene like in 1933 at the end of Prohibition where there were companies that had been beaten down to a shell of their former selves looking to revive? Were there new entities coming in? They were probably going to be in a more government-regulated space, one that continues to today, in terms of how government has kept a foot in alcohol. That's my riff. Kyle, I think there is a parallel.

Matt Hawkins: There absolutely is, because there's a three-tiered system in alcohol and that's one thing that the federal government would have to get their arms around if they decided to make it 100% federally legal and federal oversight controls everything. Right now there's not a three-tiered system in a lot of states. In some states, like California, you can be vertically integrated completely and that's a huge problem because you're going to have real issues if you try to break up those companies that have done that. That would be next to impossible.

Matt Hawkins: Good question. We originally, back in 14, we started the company, it was called Cresco Capital Partners. Cresco is Latin for grow and then over the years we kept getting confused with our friends at Cresco Labs, which is a multi-state operator, and Charlie Bachtell, who is the CEO, would literally sit there and laugh at conferences about how many times people would ask us about the other and I finally just said to him, "We're changing our name. I'm sick of this." He laughed and said, "thank you."

Kyle Woodley: I actually did have a question about your status working in private equity, which means, frankly, you get to invest in companies before we do. You get to invest in the earlier stages and that means you're probably going to be closer to the leading edge of technology in this space. And so my question for you is, what is there that you see out there that you look at and you're like this is interesting leading-edge technology of the marijuana industry.

Matt Hawkins: That's a tough one because the technology side, we have made a couple of investments in that space, but I would put breeding and biosynthesis and the propagation of the plant, those things are the genetics, and all those I consider to be the technology side of this. And from that standpoint, I think that's where you're going to see some real interesting things happen over the next several years. You've got botany experts and horticulturalists that are coming into the industry unlike ever before that were coming from other parts of the food chain outside of marijuana. And so that, to me, shows the influx of not only talent but also just insight and development and progress. We've got a few plays in those arenas and we're excited about the prospects.

Kyle Woodley: The technology answer was right on the money because technology, what that looks like, just completely different by sector. It's not always like AI or a smartphone in front of you. This is effectively the ag sector, the ag industry and so in that case, yeah, whether you're putting a product out that is either higher potency or better crop yield or whatever, those are exciting technologies, maybe not necessarily to just your passerby or whatever, but they are very exciting if you're inside the industry.

Matt Hawkins: Yep. Couldn't agree more. Those sectors, you'll start hearing a lot more about where they are headed as some of the companies that actually, some of them that we've been involved in for a couple, three years now, once they start making the big headways, you'll start hearing more about that and I think it's one of those things that will be very attractive to the con-agras of the world, for example. They want to be in this business, they're just handcuffed right now because of the legality.

David Muhlbaum: Well, I filed an extension and I paid what I think I owed. I'll sort it out later. But yes, it's that cobbler's shoes metaphor. I attempt to do as good a job as I think I know I should. But of course, as part of that, I was up to my eyeballs in either paper or digital paper, with my wife using an app to scan and create PDFs out of the things that we still have on paper and then archiving things as I went into the Google Drive so that I can hopefully find them again. But the whole thing reminded me of, a) that keeping paper is going away, but, b) it has not gone away yet so I think we should maybe touch on a little bit of, hey, tax season's over, I hope it's more over for you than it is for me. What do I do with this stuff, because it's just sitting there in a manila folder?

Sandy Block: We've been doing this article for every year and it's always very popular and people always argue with us about it. What to keep and what you can safely throw away. I think most people err on what to keep and actually what your wife is doing is really smart because the IRS does accept digital versions of documents, so scanning things, as long as you've got some kind of system. You don't have to keep everything and you probably shouldn't because then you risk losing stuff that you really want. A couple of things you might want to keep potentially forever is one, just your actual tax return. That's a really good record for-

Sandy Block: Well, some financial planners say to keep it, you don't have to. And we'll go through that. But the idea of keeping your tax return is this: It's a really good snapshot of your life at that time and if you applied for a mortgage or want to start a business or any kind of loan, you don't know how far back they're going to ask to see your taxes so I personally keep the actual return. Again, you can keep a digital, if you use tax software, it's probably stored for you somewhere. And you can get it from the IRS, but I do keep the actual return.

Sandy Block: And usually, they will give you a PDF. I have them on my computer. The other thing you might want to keep is your W-2 forms, which is just one thing you get at the end of the year. We're not talking a mass ... and the reason you want to hold onto that is when it comes time to file for Social Security sometimes there are errors in your earning record and that could hurt your benefits so you're going to want to be able to point to these W-2 forms and say, yes, I did work at this place this year and as a result, I owe benefits for that time.

Sandy Block: You can do that every year, which I have not done. Yes, you could go through it every year and make sure it's right, but just in case you don't, the W-2s are a good backup. And I think it's good to know how much you made. I like to go back and say how did I possibly eat on that salary. That's a journalism thing. The general rule is this, the IRS has three years after the due date of your return or in your case, the day you actually file it, if you get an extension to kick off an audit of your returns so you should hold on to your tax records at least until that time has passed. But as I mentioned earlier, there are some records, like maybe the actual tax return and your W-2s that you want to hold on a little longer.

Sandy Block: Right, exactly. Now, the things you should keep, we mentioned the IRS has three years to audit you. There is an exception that I'll get to in a minute, but because within that period, you should hold onto all of the documents that support any income, deductions, or credits claimed on your tax return for those last three years after the tax filing deadline. And that includes, again, your W-2s, which you're holding forever anyway, 1099s, if you have deducted mortgage interest, and again, a lot of these things are digital. 1098 forms, canceled checks if you made charitable contributions --and you still are able to deduct them.

Sandy Block: That's a good question, but I wouldn't assume that, if your information doesn't match theirs, maybe you were right. I wouldn't count on my brokerage to have them for one thing. What if the IRS comes back and audits you and your brokerage has gone out of business or something? You don't know. Those are just things that the IRS might want to see if you get audited. And the other thing I wanted to mention is you took withdrawals from a health savings account or a 529 plan, you went eligible expenses and contributions to a tax-deductible retirement savings plan, just a traditional IRA, because again, you are deducting these things on your tax returns. If you don't itemize deductions, and most of us don't, you don't have to hold onto as many of these things.

Sandy Block: Yes. The caveat here is we've got this little break in the coronavirus legislation. We were allowed to deduct $300 of charitable contributions or $600 this year if you're married. So you would want to hold onto records of that. But in general, if you don't deduct, you don't need to hold onto all that stuff because you're not deducting it. If you're not deducting your mortgage interest, you don't need to hold onto documents for mortgage interest because the IRS isn't going to ask you about it.

David Muhlbaum: Right. Fundamentally though, and I guess I'm coming back to my point about which forms and what kind of recordkeeping matters. I agree with you on the principle, but I think one of the things people could almost inform themselves with when making these decisions about where they really need to pay attention to recordkeeping is another bit of Kiplinger content about 22 IRS Audit Red Flags because if you look at those and you look at those and see, is anything I'm doing in these categories? It doesn't mean you're doing something wrong, it just means your tax return has categories that the IRS likes to pay attention to. That's an additional warning that you better have your paper in order if you are filing that kind of return.

Sandy Block: And that's a really good point, because I think one area that I'll just touch on briefly. We could do a whole segment on it, is if you work for yourself. I used to interview a lot of self-employed people and almost all of them had been audited and the reason is when you work for yourself, you're self-reporting. Our taxes are withheld from our paychecks so it's hard for us to cheat or make mistakes really because the money just goes right to the IRS. But if you work for yourself, you are reporting your income. Basically, it's on you to report your income. It's on you to report your expenses and I think the IRS routinely audits a lot of those tax returns just because they don't have a backup like they do. So if you work for yourself, my advice is, keep just absolutely assiduous records. And I think that's a really good idea to put the audit red flags because it will show some other things that just sort of might get the IRS's attention and you do want to keep better records.

David Muhlbaum: That will just about do it for this episode of Your Money's Worth. If you like what you heard, please sign up for more at Apple podcasts or wherever you get your content. When you do, please give us a rating and a review. And if you've already subscribed, thanks. Please go back and add a rating or review, if you haven't already. To see the links we mentioned in our show along with other great Kiplinger content on the topics we've discussed, go to kiplinger.com/podcast. The episodes, transcripts, and links are all in there by date. And if you're still here because you want to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram, or by emailing us directly at podcast@kiplinger.com. Thanks for listening.

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Kyle Woodley is the Editor-in-Chief of WealthUp, a site dedicated to improving the personal finances and financial literacy of people of all ages. He also writes the weekly The Weekend Tea newsletter, which covers both news and analysis about spending, saving, investing, the economy and more.

Kyle was previously the Senior Investing Editor for Kiplinger.com, and the Managing Editor for InvestorPlace.com before that. His work has appeared in several outlets, including Yahoo! Finance, MSN Money, Barchart, The Globe & Mail and the Nasdaq. He also has appeared as a guest on Fox Business Network and Money Radio, among other shows and podcasts, and he has been quoted in several outlets, including MarketWatch, Vice and Univision. He is a proud graduate of The Ohio State University, where he earned a BA in journalism.

You can check out his thoughts on the markets (and more) at @KyleWoodley.