There is a compelling case that can be made for investing in the marijuana business, provided you have no problem with the product and its effects.
Not long ago, I got a call out of the blue from my friend Kevin. We sometimes work together on a side gig and he often asks me money questions in the free moments when we do.
But this time he was calling, and his tone was serious.
“I see what’s happening on the market,” he said, “and I want to know how I can invest in marijuana stocks?”
The one sure way I know an investment is turning from a bad idea for the average investor into a fad is that I start hearing about it from people who have never asked me about blue chip stocks or brand-name companies, or it’s the buzz at the barber shop, or it starts attracting fortune hunters.
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Mind you, Kevin had heard the good story being told about cannabis companies. Besides being legalized in a growing number of states including Massachusetts, where I live — and with legislation now floating that could legalize marijuana nationally — the drug was recently legalized in Canada. Our neighbors to the north recently became the second nation — following the example of Uruguay — to legalize cannabis sales.
Indeed, there is a compelling case that can be made for investing in the marijuana business, provided you have no problem with the product and its effects.
I’m not going to make moral judgments here, I’m simply going to point out how many of the people enticed by the whiff of the fortunes being made in pot stocks are leaving their comfort level behind and are likely to watch their investment dollars go up in smoke.
While the logic behind this applies to the cannabis business, marijuana is just the latest example. This same kind of thinking has been evident with bitcoin and any number of other items that become faddish.
“There is a way to invest in these things, and it’s definitely not the way most people do it,” said Patrick Wood, chief executive officer at The Tormont Group, which has been helping to bring cannabis-related companies to market on the Canadian exchanges. “Yes, there is enormous potential, but there is also tremendous risk.”
Legalization may make marijuana available to recreational users, but cannabis stocks are not right for recreational investors, guys like Kevin. The majority of pot stocks are tiny, trading in penny-stock range, and their volatility has made them a favorite with traders, sharks and sharpies. These are technical analysts who are using charts and graphs and market patterns to make money more on the volatility in the field than on some belief that pot stocks are booming.
The names involved move wildly on rumors; India Globalization Capital, or IGC, saw its trading on the NYSE American suspended Monday — with exchange managers looking to delist the stock — because the company was not moving to develop the line of beverages spiked with cannabinoids that had speculators blowing the stock up (or down) on every hint of a planned product.
IGC moved from $2.33 per share to $13 per share in about a week in late September, then proceeded to give back all of its gains as the news got worse and worse.
Even the larger, established pot producers — companies like Tilray (TLRY), Canopy Growth Corp. (CGC), Cronos Group (CRON) and Aurora Cannabis (ACB) — are moving double-digit percentages on any day when there is industry news.
While guys like Kevin think they want to get in for the long-term potential of these firms, they can’t stomach the ride. They’re investing on hope, buying the story without considering the fundamentals.
This is like the recreational gambler who wins the monthly beer game with buddies thinking he can sit down with professional cardsharps and win playing his down-home style while they run their cash-game tactics against him.
It’s not happening.
So the person pursuing the cannabis story then goes looking away from the penny stocks and the pink sheets and even the pot growers and instead buys into sin stocks on the fringes of the story, like alcohol producers with an interest in cannabis companies.
“It’s not a great way to play the cannabis industry because you are buying these companies for exposure to marijuana but they make a minuscule portion of their revenues from it now,” said Jordan Waldrep, manager of the USA Mutuals Vice Fund (VICEX). “You can’t call a big beer company a pot stock just because it has some small interest somewhere in cannabis.”
Because the brand names on the edges of weed don’t generate a real cannabis high, investors like Kevin could look to score through a safer, more logical choice, something like the ETFMG Alternative Harvest ETF (MJ), a diversified exchange-traded fund that invests in the major pot producers.
“This gives you a little bit of everything in the industry, and lets you ride the trend, and while it is still plenty volatile and risky, it’s not like putting all your eggs in one basket with one pot stock,” said Tom Lydon of ETFTrends.com.
The fund shows all of the whipsaw volatility of the cannabis business. According to Morningstar, MJ is down roughly 27 percent in the last month, but has gained about 10.5 percent in the last three months, all while losing nearly 10 percent this year.
That kind of pattern would scare off most average investors, but it worried Kevin for a different reason, namely that buying an ETF in the space felt too pedestrian, like it wasn’t going to achieve the kind of high he is looking for with individual pot stocks.
When ordinary, normally rational people start thinking this way — thinking riskier choices are the better bets and dreaming of fast profits — it doesn’t matter if it’s pot stocks or blockchain or anything else, it’s a recipe for taking chances that will more likely lead to money going up in smoke than it will to fast riches.
It’s OK to find a story to invest in, but don’t fall for investment fairy tales — throwing away your common sense in the process — and expect to profit happily ever after.