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Report on Business writers Tim Kiladze and Mark Rendell’s brilliant, detailed account of how Bay Street cashed in on the market’s cannabis frenzy and then left investor portfolios to endure the resulting carnage contains the following:

“With little access to fresh cash, Canada’s licensed producers now face a new reality. They have spent years focused on financings to fund their expansions, paying little mind to positive cash flow. Without new capital, they will have to scrap construction projects and scale back growth plans. ‘The vast majority of the companies are going to go bankrupt,’ said Igor Gimelshtein, the former chief financial officer of MedReleaf Corp.”

These words immediately reminded me of the technology bubble which shouldn’t be a big surprise – I’ve been comparing the late 1990s to the surge in cannabis IPOs since at least early 2017, when I wrote, “Referring back to technology stocks in the late 1990s, it is entirely normal for a new, high growth market sector to see an investment bubble grow and burst before sustainable profit growth begins. The marijuana sector may not play out that way, but it is a definite risk to investors.”

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The portfolio losses as the tech bubble imploded and the recent losses in cannabis stocks did not occur because investors over-estimated the eventual scale of the opportunity. To the contrary, these finance bubbles occurred precisely because the future growth was so readily apparent.

When a long-term business opportunity in a nascent industry is so undeniable, investors race to get their money involved. Investment bankers are only happy to find more and more related companies to sell to investors and over time, the quality of each stock going public deteriorates while the prices investors pay continues to climb.

Investment manias – tulip bulbs, South Seas, Japan in the 1980s – are all similar in that they represent avalanches of investor funds that comes in faster than the money can be intelligently allocated to businesses with solid long-term prospects.

Ludicrous valuations – cannabis industry leader Canopy Growth Corp was trading at 138.1 times revenues in October 2018 – and a seemingly endless chain of initial public offerings is always a combination that investors should fear.

The good news is that, like investors that bought Apple Inc. when the iPhone came out in 2007, the big money gets made after an investment bubble implodes and the new industry proliferates through the economy.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

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Stocks to ponder

Enghouse Systems Ltd. Over the years, management has successfully delivered both revenue and dividend growth. From a valuation perspective, the share price is currently trading below its historical trading averages. Jennifer Dowty profiles the stock.

The Rundown

Stock markets are completely out of touch with reality. Here’s what investors should do next

The S&P 500 hit a new all-time high last week, ignoring warnings of a softening global economy. This may be due in part to the isolationist view of U.S. investors. The American economy continues to perform well from the point of view of job creation and GDP growth. So, why worry? Gordon Pape lists some reasons, and suggests what a ‘crisis portfolio’ would look like for those that are worried about a big market drop.

Those dogs in your portfolio can save you at tax time

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Did your bet on marijuana stocks blow up in your face? Do you own energy stocks – or other companies – that are deeply underwater? With the end of the year approaching, you may want to consider selling your dogs so that you can claim a capital loss for tax purposes. John Heinzl explores the strategy in detail.

Others (for subscribers)

Monday’s Insider Report: CEO and 3 directors are buying this beaten-down dividend stock

Monday’s analyst upgrades and downgrades

Ask Globe Investor

Question: How do I withdraw from a LIRA due to financial hardship that is under Federal regulations?

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Answer: Withdrawing from a LIRA due to financial hardship requires you to apply to the government for approval first. If you get the approval you can submit it with the deregistration request to your financial institution.

Here is the link to get the necessary information I think you need:

--Nancy Woods, Vice President, Portfolio Manager and Investment Adviser with RBC Dominion Securities.

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

This coming weekend, Rob Carrick will present a broker-by-broker listing of which high interest savings ETFs and mutual funds are available to clients.

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Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Click here share your view of our newsletter and give us your suggestions.

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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