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Shark Tank's Kevin O'Leary: Why I'm betting big on psychedelics, and how investors should be thinking about this opportunity

  • In this op-ed, Shark Tank investor Kevin O'Leary explains why he and other Wall Street investors are betting big on psychedelic mushrooms.
  • On Election Day, Oregon became the first-ever state to legalize psilocybin, a psychedelic compound found in "magic" mushrooms, for therapeutic use.
  • Investors who were burned by bad bets on cannabis startups shouldn't be afraid to gamble this time, says O'Leary. Psychedelics look different — in a good way — and the pitfalls that befell early cannabis investors aren't likely this time around.
  • O'Leary recommends three things if you're on the fence about investing in psychedelics: understand the relative risk, understand the market opportunity, and watch the money.
  • Visit Business Insider's homepage for more stories.

On Election Day, voters in Oregon and Washington, DC approved measures to decriminalize psychedelic mushrooms and promote their safe medical use.

Magic mushrooms and LSD are being listed on the NASDAQ, HBO's Billions' series premiere opened with Bobby Axelrod drinking ayahuasca, while real-life billionaire and hedge fund manager Steve Cohen just donated to a charity developing MDMA for military veterans.

Psychedelics are finally having their day in the sun — not as recreational drugs, but as medicines to address society's problems with mental health and addiction — and I'm one of the many Wall Street investors that are now backing them.

As an investor, my approach is quite simple. I always look for solutions and trends with the potential to solve vast problems for large amounts of people.

It's impossible to ignore the outright collapse of America's mental health and the fallout that will ensue from COVID-19. This past summer, the CDC reported 11% of American adults considered suicide while a whopping 40% reported they were struggling with mental health or substance abuse.

If psychedelic medicines such as psilocybin, LSD and MDMA have the slightest potential to help restore America's mental health, then so be it.

Read more: 8 world-class investors share how they've positioned to profit from the long-awaited COVID-19 vaccine breakthrough — and the bets they've been making all year on a post-pandemic world

Investors burned by bad bets on cannabis startups may be afraid to gamble on another class of DEA Schedule I substances, but they shouldn't be, and here's why. 

Any company or industry that relies solely on politics in order to open or build their market share deserves investor skepticism, and for cannabis that was certainly the case: the entire model hinged on the industry successfully lobbying to operate in Canadian provinces and US states without federal approvals in place.

So, while it was a very tough few years to watch as some companies became $20 billion+ market caps overnight, the smart money rightly predicted that US Congress would not legalize cannabis and that companies would fail to attract institutional capital support without federal regulations.

The result? Most cannabis companies lost significant market capitalization as investors quickly realized that they had invested in a non-proprietary commodity best grown and harvested in warmer climates.

I believe psychedelics are going to be very different, and it's important for investors to understand why.

Here's how I recommend thinking about this opportunity. 

1. Understand the relative risk.

While psychedelics are also DEA Schedule I substances, the companies developing them are doing so through federally regulated FDA clinical trials. Compass Pathways, MindMed and ATAI are the 'three horsemen' emerging as the leading companies with the most number of trials. (Disclosure: I'm an investor in Compass and MindMed.)

In short, they're not betting big on their lobbyists to create a market for them.

2. Understand the market opportunity.

The opioid crisis costs America $500 billion a year, and the Lancet Commission on Global Mental Health estimates that mental health disorders could cost the global economy up to $16 trillion between 2010 and 2030.

Over a billion people worldwide are suffering from depression, substance abuse, anxiety, or PTSD. Canaccord values the market for psychedelic inspired treatments at up to $100 billion.

This tells me that psychedelic medicine might just be a whole new asset class. 

3. Watch the money.

Private equity and venture capital has been flowing to psychedelic inspired medicine, and institutional and retail investors are already getting in line behind them.

Compass Pathways, backed by Facebook investor Peter Thiel and biotech investor Christian Angermayer, recently had a very successful IPO on the NASDAQ, jumping 71% on its first day of trading as it pursues a Phase 2 trial of psilocybin, the active ingredient of magic mushrooms, for depression.

MindMed was the first psychedelic medicine company to list on the senior Canadian exchange NEO in March and recently announced its intent to also list on the NASDAQ as it pursues multiple clinical trials for treatments for adult ADHD, anxiety disorders, and opioid addiction.

I like investing in novel solutions to big problems.

Treating mental health and substance use disorders more effectively may be the largest problem ever.

That's not to say that any single investment is a sure bet. I have been investing in Pharma and biotech for years, and trust me: it's always a long game and the outcomes are typically binary. None of these companies make money to start, and they will have to raise hundreds of millions of dollars to complete their clinical trials.

As a developer of indexes and ETFs I always want a diverse portfolio because either these investments are going to be wildly successful or they are going to zero and nobody knows which horse is going to win the psychedelic medicine race.

However, I think these companies are onto something extraordinary, and the impact on society and the millions suffering globally from mental illness and addiction could be profound.

Our grandchildren will look back on this moment and ask why a substance that had the potential to solve such large problems in society was ever banned in the first place. 

The inventor of LSD, Albert Hoffmann, said before his death that he hoped his "problem child could become a wonderchild." In 2020, the psychedelic medicine industry matured; the next few years will tell whether it can continue to mushroom into a wonderchild.

Kevin O'Leary is Chairman of O'Shares ETFs, online robo-investment advisor Beanstox Inc., and an investor of ABC's Shark Tank.

This is an opinion column. The thoughts expressed are those of the author(s).

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