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Investor's Perspective: Top 3 Things to Consider before Investing in Marijuana


Investing in Marijuana, as with any other business comes with risks; however, the marijuana industry has a unique set of risks that you as an investor should take into consideration before taking the plunge.


In this article, I will expand on the top three things you should consider if you have an interest in this space. This list is by no means an exhaustive list all of the factors that should be taken under consideration before you invest in this industry, but this does provide a robust framework of where to begin. As always, I highly recommend that you consult with your wealth manager before you execute any transactions as an investor.


Beware of the "Shiny New Object" syndrome


An overabundance of optimism usually occurs whenever a new and exciting industry emerges for investors to pounce on in the pursuit of wealth expansion. This is what I refer to as the "Shiny New Object" syndrome.


This sets the stage for speculation to feed off the excitement of the market until it eventually becomes strong enough to overpower the "intelligent investor." At this stage, it becomes immensely tempting for the intelligent investor to throw all logic out of the window to join the growing crowd of overzealous speculators.


Don't let this be you. Stay disciplined and conduct your due diligence.


Federal Regulations & Lawmakers


Although this emerging industry has experienced significant growth in its early days, you must not forget that cannabis is still illegal in most countries.


For example, the U.S. federal government continues to hold its position on Schedule I classification, even though 29 states have legalized cannabis to some extent. The U.S. Drug Enforcement Agency (DEA) defines Schedule I substances as drugs with no currently accepted medical use and a high potential for abuse. Cannabis is now legal across Canada, and this has created conflicting cannabis policies between both nations.


What this means for you as the investor is that the conflicting policies will slow down the domestic growth of this industry, which will potentially slow down the growth value of your cannabis investments. Ask yourself this question, "am I comfortable with pursuing this investment given the current climate of federal regulations?" 


If the answer is yes, carry on with your analysis. If the answer is no, you should abort this mission.


Scarce Supply of Financial Data


I will highlight one prime example here.


One of my general principles of investing is to analyze at least five consecutive years of financial statements before I invest in any stocks. As it stands, the largest marijuana stock per market capitalization is Canopy Growth Corp (CGC), and this company only has publicly available financial data from January 2018 to date. This will make it very difficult for the intelligent investor to obtain a thorough understanding of the historical financial performance concerning the potential future performance of the company.


CGC currently has a reported profit margin of -160.90%, which means that they have been losing money so far as a new publicly traded company. However, this metric does not necessarily mean that this is a bad long-term investment because most startups lose money within the first 1-3 years before it begins to realize positive returns.


Nonetheless, the scarcity of financial data in this emerging industry will require a much more in-depth than usual analysis to gauge a sense of the future performance of any publicly traded cannabis company.


Closing


As I stated at the beginning of this passage, this is not an exhaustive list of cannabis factors that you should consider as an investor, but this should give you a good starting point.


Yes, the cannabis industry is a new and exciting industry. It is indeed the "Shiny New Object" among hot commodities, but the intelligent investor keeps his/her emotions in check. The intelligent investor will trust his/her own judgment, and will not contrarily follow the crowd just because Wall Street is proclaiming it as the new hot stock. The intelligent investor will not sacrifice their principles nor fall victim to temptation through the speculative noise.



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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.


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