Doublethink | My Worst Investing Mistake

How a pick-and-Shovel play on the Weed industry turned into a fraud-riddled disaster.

Do you remember 2021? I do - I remember it well. Stocks had rebounded big time, and those of us who were buying during the Covid sell-off were feeling pretty damn good. I was only 2 years into my investing journey then, and my chest was rather puffed. I felt confident. I had taken risks and they had paid off.

But something else was going on too…

Part 1: There’s a Bubble

See, when I began buying stocks in 2019, the investing world looked a bit different than it does today. There weren’t thousands of Youtube channels and Tik Tok “investing gurus” littering the internet with nonsense. During the pandemic, however, the investing landscape changed.

Thanks to Robinhood, stimulus checks, and people being forced to stay inside, “investing” became fashionable. I was rather disturbed to see random friends, family, an neighbors - people who didn’t know a holding company from a hole in the ground - suddenly talking about some new stock they were buying. In fact, this was such a common experience that a friend of mine and I regularly sent each other Big Short meme’s, specifically this one:

It was a fun joke, but it was also a strange experience. I was hearing people say things that I previously would have regarded as bad dialogue in a movie about a bubble. Things like, “Kathie Woods is the new Buffett” - yeah, that one really wedged a wrench in my bicycle wheels. Thats a real thing someone twice my age said to me. Someone with no investing experience until that year. Someone who was literally holding $SQQQ. Imagine holding something that is triple short the Nasdaq while also owning ARK’s flagship funds.

This was lunacy, and it was everywhere. Superbowl ads about Crypto, Robinhood with the damn confetti, and my neighbor in Brooklyn who said he was invested in EV’s, but was actually just the owner of shares in a SPAC that had been rumored to acquire an EV company….

And on and on it went. My roommate, an ACCOUNTANT BY THE WAY, was invested entirely into an alt-coin recommended to him by his newly divorced day-trader friend who used the word “rarri” non-ironically in real life. (thats, “Ferrari” in idiot-speak).

Oh and lets not forget the Croatian neighbor girl who asked me to explain investing to her (which I spent hours doing…possibly with the hopes of a different sort of ROI), only to turn around and spend 3k/month on a Forex trading class.

Now look, I was not a seasoned investor, and nor was I one who had avoided making mistakes. But even I knew there was trouble afoot…and I was about to make my own mistake.

I may have been sure there was a bubble, but I wasn’t going to move to cash. Instead I decided I was qualified to navigate this froth. After all, it was the everything bubble. As far as I could tell the froth was unavoidable. I would have to try and find some companies who could outgrow these current expectations. So who better than a company who’s business is growth.

Part 2 : Pot Stocks

I never had a taste for the sticky-icky personally, but damn if everyone else I knew seemed to consume weed constantly. Seemed like 70% of my friends smoked pot on a regular basis, and 50% of them were investing in pot-stocks.

It always made sense to me for the U.S to legalize weed. It would rip up the margins of drug cartels and provide some extra revenue if it was taxed at “sin tax” type rates. It seemed inevitable to me, since so many people use it or are basically agnostic to the pot-use of others. But that didn’t mean pot-stocks were a good idea - I wasn’t that naive.

As Buffett says, when you see the advent of the automobile coming, you don’t buy cars, you short horses. I figured, out of the hundreds of weed companies, maybe maybe 3 would still be around in 10 years.

But then I found Grow Generation $GRWG.

“A pick and shovel,” I said. These words haunt me. At the time I thought I had discovered a gem. Here was a new company which would become the home depot of Hydroponics. I figured this market placement kept them out of the regulatory purview, and also positioned them to capture some revenue from non-weed plant growers. Moreover, when this big boom in at-home pot growing took off (as I was sure it eventually would), GrowGen would be there to capture it.

“Not everyone will get rich off of growing weed, but all of them will be spending money at GrowGen.” - My dumb ass in 2021.

Just so you know, this company was positing profits. Sure their PE multiple was high at 60x TTM or something, but I figured we were early days here! Plus the stock had already declined by about half, and so I saw my opportunity and I bought. At the time I actually was actually buying a fair chunk considering my total portfolio value back then. But I was convicted, and the reality is I was trying to find my own “intelligent” way to invest in the future along with all the other saps.

And I was a sap. A fool damnit! Greed. I wanted more. Sure I had already doubled and almost tripled my money in TSM, but I wanted more and thats just the ugly truth of it. So what did this greed do to me? It made me sloppy. I didn’t read a single 10k. I didn’t research management, and I sure as hell didn’t pay any mind to the sketchy Google street view of the stores.

Had I looked a bit closer into this company I had read about, but didn’t truly understand, I may have noticed a few things.

1. I may have noticed that the children of two C-suite members had previously worked as club promotors and were now executive level at the company.

2. I may have noticed that there weren’t very many real customer reviews for these businesses

3. I may have notice the fraud allegations and convictions of various members of the Board and C-suite.

In short, I would have realize this was - among other things - a bullshit business. And worse, I told a friend about it, and she bought too.

And then….

Part 3: Hindenburg Research

Hindenburg Research is a short seller - an activist short seller at that. Its reports on Nikola, Lordstown Motors, Clover Health, Block and (most spectacularly) India’s Adani Group wiped billions from market caps and triggered multiple regulatory probes.

Their report on GrowGeneration includes phrases like; “uninvestable,” “the brightest red flags we’ve ever seen,” and… well, hell I’ll just paste it here:

“President & Co-Founder Michael Salaman was alleged by the FTC to have engaged in schemes to sell consumer credit card information without authorization. He has an extensive career in penny stock failures alongside his father, Abraham Salaman, a twice-convicted fraudster with ties to the mob.” - Hindenburg Research.

I owned this fuckin thing. The stock was plummeting like crazy and I was frozen. I basically just held it on the off chance this report would turn out to be somehow false. The stock fell from ~$60 → ~$2. Lights out.

If you want to read the full report here it is:

Part 4: Rubbing My Nose In It

Here’s the bit that is so embarrassing I considered leaving it out: this report came out before I bought shares. I was looking only at the earnings, the valuation, and the business “pitch.” The result? I didn’t have a clue that this report was out there until the stock started falling, and I finally started doing my homework.

It fell with everything else in 2021, and like many companies that roared during that period, they never got back up again. What a damn fool I was not to look closer. Today I would roll my eyes at someone who behaved as I did! I can’t even use the “how was I supposed to know it was a fraud” cop-out, because all I had to do was look…

Suffice it to say that this burn taught me a very valuable lesson. If I want to put my money into a company I damn well better know everything I can about them. I better read the 10k’s and - especially for smaller companies - make sure there aren’t FRAUD ALLEGATIONS about mangers with ties to the damn MOB! I’m not mad at these folks at all, this is on me 100% for being greedy, lazy, and impatient all at the same time; all while looking down my nose at that same behavior among my peers.

Part 5: DoubleThink

I’m not sure how many 1984 fans there are out there - although something tells me my Substack has a disproportionate number of them. Anyway, in the book there exists this idea of “DoubleThink,” whereby a person holds two conflicting ideas in their mind at the same time. This is how I think about my mistakes with Growgen. One could argue that the mistake was simple lack of research, but I think the issue is deeper than that. I must have believed to some extent that by my sheer awareness of this inane investing culture, I was thereby immune to it. Nothing could be further from the truth.

Instead, the opposite was happening. The more I criticized and sneered at my fellow man, the more I convinced myself of my own immunity. This, in turn, resulted in a false confidence which led me to be rash at the very moment I should have been overly cautious. All it takes is a few wins for an investor to suddenly believe he is smarter than he really is. And this, my friends, happened to me.

Did I see a stock that had risen 600% in a year and see red flags? No. I rationalized with questionable statistics about the future weed industry, and the many people I knew already growing their own pot. Lets be real, I saw so much stuff I didn’t own roar 50%, 100%, 200% and 1000%, and I saw this company as an opportunity to do the same - not the research project it should have been. I threw off the chains of realism for the cocaine of a zeitgeist frenzy. I forgot those chains were placed there by me as restraints, binding me in protection from my own foolishness.

I hath become greed, destroyer of sanity.

Part 6: It Either Hurts or Costs Money

I have a family friend - an old Vietnam vet guy who reminds me of Clint Eastwood - who said to me once,

“Every time i’ve ever learned something it either hurt, or it cost me money.”

And this one hurt….and damnit if it didn’t also cost me money.

Today, I don’t chase stuff as a rule. I don’t care what the PEG is or what analysts say. I read reports and I focus on the boring stuff. I listen to earnings calls, and I question my own beliefs as well as the statements of management.

After GrowGen crashed, I started writing my “letter to shareholder” (me), which has turned into this Substack. I realized I was not holding my ideas accountable. My lesson from Growgen led me to sell Celsius when I started sniffing bullshit in the air. Does it mean i’m right? No, but at least if I’m wrong now it will be because my thinking was wrong, or something truly unpredictable happened; not because I got greedy.

I also stopped talking to idiots about investing. Turns out I never gain from that, even when i’m right. The Rarri guy? Broke. The accountant? Lost it all. EV-Spac guy? Yeah he got wiped out. Oh, and that Croatian chick? She moved out and no one has heard from her since.

Such was the story of my worst investing mistake to date. Me? I lost ~4% of my portfolio. Everything else I owned did just fine. Still beating the market even including that loss. This is a forgiving game, if I learn the right lessons when I lose.

Growgen?

…well, almost 0 anyway. GRWG 0.00%↑

Talk to ya later

-MoS