Distinguished Speaker Series: Vivien Azer, Cowen & Co.

Cowen’s Views on Cannabis

On July 9, Vivien Azer, the analyst responsible for covering cannabis at Cowen & Co., presented her views at CFA Society Chicago’s Distinguished Speaker Series luncheon at the University Club. Cannabis/Hemp/CBD is an “emerging” sector within the U.S. and Canadian stock markets as legalization of the formerly stigmatized substances has begun to change.

Azer concluded that the “relative size of mature Consumer Products Group (CPG) categories reflects a long runway for growth in cannabis”. The global size of the alcoholic beverage market is $1.3 trillion, the NARTD (non-alcoholic ready-to-drink) market is $1.2 trillion in size with traditional tobacco being $800 billion, while the currently “illicit” cannabis market is estimated at $150 – $200 billion in size.

Azer started coverage at Cowen & Co. in September of 2016 and the two questions she asked before starting to examine the sector were: 1) Can Cowen make investors’ money covering cannabis; and, 2) Can Cowen make companies money (presumably bringing private companies public) covering the sector?

The Disruptees:

Within the Consumer Products Group (CPG), there are 4 distinct verticals:

  • Adult Use which includes breweries like BUD, Heineken and Molson (TAP)
  • Beauty & Nutraceuticals which encompasses Coca-Cola (KO), Pepsi (PEP) and cosmetic companies like Estee Lauder (EL)
  • OTC Pain / Sleep, which is primarily Johnson & Johnson (JNJ) and Procter & Gamble (PG)
  • Traditional pharmaceuticals like Merck (MRK), Eli Lilly (LLY), and AstraZeneca (AZN)

Azer noted that both Constellation Brands and BUD had either made investments in the cannabis space already or were interested since the traditional breweries and alcoholic brands were likely to be disrupted from cannabis as consumers see it as a psychoactive substitute.

Don’t forget Canada (The Great White North, eh?)

Azer and Cowen believe that cannabis represents a $12 billion market opportunity in Canada by 2025 with retail accounting for the bulk of the sales. One slide showed the monthly progression of Canadian retail sales in cannabis from October 2018 to March 2019 which cumulatively represented $300 mm (CAD) in retail sales. Cowen seems to see Canada as an early leading indicator of U.S. retail sales since Canada seems so far ahead of the U.S. in terms of its retail rollout. The early retail sales adopters in terms of Canadian provinces are Alberta, Ontario, Quebec and Nova Scotia with each having 24%, 23%, 13% and 8% respectively of Canadian cannabis sales. Alberta has 13% of Canada’s population but 24% of Canada’s total cannabis sales given early bricks-and-mortar adoption.

United States:  

At the time of the lunch, 11 states and District of Columbus had legalized cannabis for adult use. Colorado was the earliest adopter in terms of retail sales but their sales slowed when California and Nevada legalized adult use of cannabis. Cowen estimates that 80% of the $50 billion cannabis market in the U.S. is currently “illicit”.  By Q1 ’19, five states had generated roughly $5 billion in cannabis revenue and those were Colorado, Washington, Oregon, Nevada and California. Cannabis use has clearly come at the expense of alcohol.

Here are the numbers Cowen published as market sizes for various aspects of the cannabis market:

  • THC is an $80 billion opportunity by 2030
  • CBD is a $16 billion revenue opportunity in the U.S. by 2025

Vivien Azer of Cowen did a great job outlining market opportunities and the “macro” of the cannabis/THC/ Hemp/CBD markets. Canada is an interesting comparison since it appears to be out in front of the retail rollout experience. During Q&A, Azer touched on the SAFE Banking Act which will insure access to financial services for cannabis-related businesses. Since the lunch, the House has passed the SAFE Banking Act, but it still hasn’t been passed in the Senate, although passage is ultimately expected.

If you were unable to attend this event but want to learn more about the cannabis industry and where it’s headed, be sure to join us at our next cannabis event hosted by our Education Advisory Group at the beginning of 2020. Information available on the CFA Society Chicago website soon!

Distinguished Speaker Series: David Booth, Dimensional Fund Advisors

In September of 1969, an MBA student took a course that would result in positively affecting the lives of countless people, a couple of universities, and how much of the investment industry would learn to view the world.

It started with two individuals, the University of Chicago professor Eugene Fama and student David Booth. The seed of one idea blossomed into a fifty-year friendship, a history of applying academic research to practical investing and formation of a multi-national investment firm of over 1,400 employees managing $586 billion.

Along the way, after David (student) had learned finance from Gene (professor), the circle was completed as Professor Fama likes to say he learned business from Booth.

It is the only time the professor had been asked to join a student’s business. It was a natural in this case, as the firm, Dimensional Fund Advisors (“DFA” or “Dimensional”) shared the same beliefs having been spawned by ideas Booth picked up in Professor Fama’s course.

Along the way, it should be mentioned that the intersecting worlds of academics, athletics and the arts have also benefited. The University of Chicago named its Booth School of Business in the MBA student’s honor. The University of Kansas named its David Booth Kansas Memorial Stadium in honor of its former undergraduate student (note, Booth has also funded the Booth Family Hall of Athletics in Allen Fieldhouse at KU while donating James Naismith’s original 13 rules of basketball). The Museum of Modern Art has benefited in naming the David Booth Conservation Center and Department in the same man’s honor. Another benefactor has been Georgetown University which named its Booth Family Center for Special Collections within its Lauinger Library. 

It is this story that was told through the voice of the student in the forum of the August Distinguished Speaker Series luncheon on August 14th at the Standard Club. David Booth himself provided the history of Dimensional’s roots, how its one philosophy initiated 50 years earlier, how the firm takes academic ideas and implements them into real world solutions for clients, as well as DFA’s 38-year track record of delivering outperformance versus their benchmarks.

The discussion began with a short video touting the highlights from Mr. Booth’s career which is synonymous with the formation of Dimensional. His friendship with Professor Fama is central to the story. The impact DFA had on the investing universe is also notable, with accomplishments including being pioneers in treating small cap stocks as an asset class and finding a niche between active and passive investing. Dimensional has been styled as “the original factor investors”.

The bulk of the program consisted of an interview/fireside chat with current chair of the CFA Society Chicago’s Board of Directors, Tom Digenan, CFA.

Once again, a chronicle of Mr. Booth’s 50 years in the industry was recounted: how he has inspired people, his mentors (again – Fama was both mentor and a mentee), use of academics, the very large weight put on implementation, and the tension between models and reality in conducting research. 

The importance of TRUST could not be emphasized enough. Especially as it pertained to client relations and the ability to successfully navigate the ups and downs of markets.

Questions were asked about Booth’s thoughts about the significant reduction in the number of publicly traded stocks, his bias toward either active or passive, how DFA utilizes fundamental research, how his firm’s definition of value may have changed over time, and about any change in their thinking now that a new phenomenon of negative interest rates has emerged. His answers to all questions revolved around a single core philosophy that markets are efficient and over long haul there are some simple things an investor can do that will provide a very good experience long term without trying to outguess the market.

Mental Skills: Get Your Head in the Game

How to control and increase one’s mental skills was the topic that drew a capacity crowd for the latest installment of CFA Society Chicago’s Vault Series on August 20. The featured speaker was Jim Gary, a Licensed Clinical Professional Counselor with 52 years’ experience in the mental health field. In 1999, Gary started a program to help high school athletes adapt behavioral techniques to enhance their confidence and performance. One of his students was Tom Kulentes, who found the program so rewarding it led him to a career as a high school psychology teacher and, eventually principal. He also joined Gary as a partner in his counselling business. Gary’s success with student athletes received wide media attention, to the point that the Chicago Blackhawks commissioned him to work with their players and staff. He was the first mental health therapist on the staff of an NHL team, so he developed the completely new role on his own. Gary had the honor of working with the teams that won three Stanley Cup Championships (earning him a ring for each one).

Gray began his presentation with a demonstration of a simple visualization exercise. He had the audience stand up and twist their upper bodies as far to the side as they could without moving below the waist. Then he asked them to close their eyes; draw, hold and release a deep breath; and visualize repeating the exercise while trying to turn further. Then they repeated the movement with closed eyes.  Most in the room were able to turn further than they had the first time. The effectiveness of the example was evident to everyone. Gray called visualization–when the mind directs the action of the body, a simple and effective tool that everyone can use to increase their effectiveness and performance in many ways (but that few do). When we train our minds to send a positive message to the body, we will get a positive result, although Gary also demonstrated that negative messages create a correspondingly opposite effect. Visualization has even been shown to be effective in medicine. With the right coaching and a strong signal, the body can respond in a way that helps a patient recover.

Gary next introduced his partner, Tom Kulentes. Now a high school principal, Kulentes experienced such a positive impact from Gary’s counselling when he was a high school wrestler that he has applied it in his professional and personal life ever since, eventually joining him as a business partner. Kulentes approaches his role as a school administrator by assuming his students begin with an unknown, but unlimited capability–or talent–to learn and improve themselves. Such talent can’t be measured, but it can be increased with improved mental skills. These skills can be taught and enhanced with mental exercises and are one of the best predictors of performance.

Gary and Kulentes used their work with the Chicago Blackhawks hockey team to illustrate the application of mental skills counselling. Like all teams in the National Hockey League, the Blackhawks operate at the highest level of competition in their field. They employ the best athletes, selected from around the world, guided by top coaches, trainers, and counsellors focusing on attaining peak performance of both body and mind through deliberate, intense training and practice. The level of competition creates intense pressure on all participants but especially the players. They need to perform at peak levels consistently while managing the pressure of travel, risk of injury, intense media coverage, contract negotiations, and fan expectations, not to mention family obligations.

Kulentes likened the competitive, pressure-packed environment of the professional hockey player to that of investment managers. The environment creates stress which he defined as the body’s internal response to external pressure. He diagrammed stress graphically under a bell curve. A state of stress occupied the center, tallest part of the curve where the subject should feel energized and focused, where performance peaks because work seems to be easy. By contrast, in the left tail, the subject might feel bored or detached from performance which can improve as he moves to the right on the stress spectrum and up the curve. Past the sweet point in the middle of the curve, stress increases greatly and becomes distress characterized by increasing fatigue, burn-out, poor health, and culminating in a breakdown. Successful performance requires knowing oneself well enough to stay in the mid-range of the spectrum and at the peak level under the curve. Kulentes emphasized this by quoting a proverb: “Mastering others is strength, but mastering ourselves is power.”

Kulentes continued by explaining the concept of a growth mindset versus a fixed mindset, as defined by the psychologist Carol Dweck. Everyone possesses elements of both, with one usually dominant. People with a dominant fixed mindset perceive their talent, or ability, as fixed, or limited to certain areas where they feel more of an innate aptitude. Growth mindset people perceive ability as something that can be developed and increased over time with effort. They see challenges as opportunities to improve while the fixed mindset person sees them as obstacles, or risks to avoid. The growth mindset person focuses on process while the fixed mindset person focuses on outcomes. People perceived as great achievers (even over-achievers) all demonstrate a growth mindset. He presented examples such as Mozart and Einstein, along with a number of greats from the world of sports.

The attribute that most sets growth mind set people apart is “grit” which Kulentes defined as:

  • Applying sustained effort strenuously over time,
  • Enduring temporary setbacks, obstacles, and failures, and
  • Persevering until the desired goal is achieved.

People exhibiting this sort of grit will enjoy greater success than they otherwise would.  Kulentes described success as the visible part of an iceberg, lying above the surface. It’s small compared to what’s below the surface which represents the important features on which success depends such as dedication, hard work, and diligence.

Gary returned to the lectern to complete the presentation by introducing one more concept: that of the Self Talk.  This he described as a brief statement affirming one’s commitment to taking control of how the mind controls the body. As examples he provided:

  • “I will take control of the messages I give myself.”
  • “Today I will recognize negative thoughts and replace them with positive thoughts.”
  • “Don’t let the pressure exceed the pleasure.” (From Cubs manager Joe Maddon.)