The most important lesson in how to invest in marijuana stocks is to stay very aware that legal marijuana production comes with a lot of speculation and just as much risk.
The marijuana industry continues to undergo many changes, and at the same time it continues to attract a lot of investor interest—and questions—from those following the Successful Investor approach. However, it’s important to realize that these stocks are rising with momentum; their fundamentals (sales, earnings and so on) don’t support their sky-high market caps.
With Canada’s coming legalization of marijuana for recreational use—now set for October 17, 2018—and with the expected increase in marijuana production and sales, the appeal of marijuana stocks for investors will only grow. However, even for aggressive investors, it is important to understand how to invest in marijuana stocks, if at all.
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How to invest in marijuana stocks: Is it even a good idea in the first place?
As you probably know, several U.S. states have decriminalized or legalized marijuana use and now have legal production and sale of the plant. In Canada, marijuana has been legal for medical use for some time, and the government has now determined that recreational use can begin legally on October 17, 2018. As a result, TSI Network readers and subscribers often ask about Canadian marijuana stocks.
This change in the law is of course bound to lead to a shift in current and future cannabis production to service a fully 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 stock worthy of investment.
How to invest in marijuana stocks: Stay out of highly speculative promotions
The upcoming legalization in Canada is sure to lead to another round of highly speculative marijuana stock promotions.
We advise investors to stay out of stock promotions of Canadian marijuana 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 into some other line of work, and stay out of stock promotion. Right now, marijuana stock investing is a risky area.
While the marijuana industry now has a number of established producers, in the early days of decriminalization we saw many highly speculative “pot-of-gold” penny stock promotions. These typically arise in new industries.
A stock promotion launched by penny stock promoters is usually the work of their marketing departments or a public relations firm. Penny stock promotions are created to make a penny stock appear more valuable than it actually is. That’s because it’s much easier to launch a penny stock promotion than it is to create a successful, lasting business.
Ten Successful Investor tips you need to know if you hope to invest in marijuana stocks successfully—and you choose to do so
Downplay stocks in the broker/media limelight.
Limit aggressive investments to a small part of your portfolio.
Look for aggressive investing stocks with hidden value.
Look for strong management
Look for a strong balance sheet
Look for well-financed companies
Look past the hype
Look for reasonable share prices
Look for a results-focused company
Look for stocks trading on a well-regulated exchange
Bonus Tip: Aggressive investors can cut their risk with hidden assets
Hidden assets can consist of real estate or underused brand names and more—and are a key part of our Successful Investor approach. For example, companies often carry their real-estate assets on the corporate books at its purchase price, even though its value has multiplied many times over the years. Balance sheets often fail to assign any value to brand names, even though those household names have built up multitudes of loyal customers over the years.
Marijuana stocks haven’t yet built up a lot of hidden assets—their greenhouses, warehouses and so on are new and haven’t yet significantly appreciated in value. Going forward, they’ll also have trouble building up their brand names. That’s because packaging and promotion will be strictly regulated.
if you do want to invest in aggressive stocks, hidden assets a key way to cut risk.
Looking for aggressive investing stocks with hidden value can provide investors a bargain. It may also attract takeover bids.
We suggest that even an aggressive investor should choose investments with as much underlying value and as many hidden assets as possible. This is the best way to cut risk, for conservative and aggressive investors alike. At the same time, we recommend limiting your aggressive holdings to a small part of your overall Successful Investor portfolio. This is because aggressive stocks expose you to a greater risk of loss.
Will investing in the recreational marijuana market lead to significant gains for investors or will it lead to losses due to their sky-high market caps?
Are investments in marijuana a fad, or do you think “getting in on the ground floor” will pay off?
Comments
Shiv
Constellation Brands (STZ) took a 10% stake in Canopy Growth (WEED on TSE). I currently have positions in WEED, CRON, and ACB. There are other ways to play the legalization of marijuana as well – Scott’s Miracle Gro (SMG) sells hydroponic supplies and lighting while GW Pharmaceuticals (GWPH) has an approved epilepsy drug derived from cannabis. Why is TSI not covering SMG, GWPH?
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Constellation Brands (STZ) took a 10% stake in Canopy Growth (WEED on TSE). I currently have positions in WEED, CRON, and ACB. There are other ways to play the legalization of marijuana as well – Scott’s Miracle Gro (SMG) sells hydroponic supplies and lighting while GW Pharmaceuticals (GWPH) has an approved epilepsy drug derived from cannabis. Why is TSI not covering SMG, GWPH?