Most marijuana stocks are very speculative, so invest in marijuana stocks at your own risk.

There are a few things to be aware of if you want to invest in marijuana stocks.

Medical marijuana producers offer some speculative appeal. However, legal marijuana production is a wide open field with low barriers to entry, other than satisfying the regulatory requirements. This means there is no guarantee of profit.

Small marijuana producers have to overcome all the usual obstacles that small and start-up companies face. But if the legal marijuana market grows large and profitable enough, major agricultural and drug companies are likely to enter the field and take sales away from small growers.

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Speculative stocks are always a risk, understanding the nature of those risks is key

In the 18th century, pioneering economist Adam Smith said that the public tends to overvalue “speculative ventures”. We think this makes excellent investing advice for present-day investors in speculative stocks.

When a speculative stock is losing money, it has a great deal of freedom to ponder on its future. With a little imagination, it can always show that anything’s possible, based on a logical series of events that it says will take place as it advances inevitably toward profitability. Meanwhile, it doesn’t need to worry that its price-to-earnings or p/e ratio is too high, since it doesn’t have one—it has no “e”.

Avoid speculative appeal if you invest in marijuana stocks

As you probably know, several U.S. states have decriminalized or legalized marijuana use and have begun authorizing legal production and sale of the plant. In Canada, marijuana has been legal for medical use for some time, and the government is developing a plan to allow for some legal form of recreational use. As a result, we are increasingly asked about Canadian marijuana stocks.

This change in the law is bound to lead to a shift in current and future marijuana production, from the underground economy to the legal economy, where it can be regulated, taxed and invested in. Tax revenues are already starting to roll in, but we haven’t found any Canadian marijuana stocks worthy of investment. So far, most of what we’ve seen are stock promotions.

We advise staying out of stock promotions of Canadian marijuana stocks businesses or anything else. They attract the wrong kind of people. Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So they generally go in to some other line of work, and stay out of stock promotion.

Stock promoters make companies seem bigger than they appear

When they get a deal—however small or indirect—with a major, promoters go to great lengths to make it seem bigger than it really is. Instead of announcing that the big company has invested, say, $50,000, penny stock promoters may issue a press release that says the two companies have entered into a “multi-stage development plan”. The release may say the major has agreed to spend “up to $10 million” or whatever. It will usually provide a toll-free number or an online link for investors who wish to order the enticing brochures.

Big companies have more leverage

It pays to remember that a big company doesn’t go into a situation like this the same way you do, as an individual investor. If the big company agrees to spend $50,000 to study the property, program or gizmo, it will also insist on a series of options that let it invest ever-larger sums on favourable terms. But the big company will always reserve the right to drop out and cut its losses. In most cases, it will exercise that right to drop out.

A major mining company will gladly spend $50,000 100 times, and lose every penny of it—a total outlay of $5 million—if this means it will get a chance to develop the one rare project that’s worth the investment of, say, $500,000,000.

There are many obstacles if you invest in marijuana stocks

The growing trend toward marijuana legalization has spurred a great deal of investor interest. However, we have yet to come across marijuana investments we are prepared to recommend as buys.

Do you invest in marijuana stocks? What has your experience been thus far? Share your story with us in the comments.

This article was originally published in 2016 and is regularly updated.