Should I Invest In Cannabis Stocks?

What do Snoop Dogg, Gwyneth Paltrow, and ex-Speaker
of the House John Boehner all have in common? Besides their Spotify Discover Weekly playlists. They’re all major investors in a budding
new industry – legalized cannabis production. Once a taboo topic, pot is going mainstream.
A 2018 Pew Research Poll found that 62% of Americans believe marijuana should be legalized
– the highest number in the last 50 years. With the recent law changes in Canada and
some U.S. states, the legal winds seem to be shifting for cannabis. And nothing helps fan the flames of change
like the prospect of making some serious green. A 2018 research study projected medical marijuana
sales to grow by 36% per year, making it a 55 billion-dollar industry by 2024. And CBD, a derivative
of cannabis, was projected to grow by 700% between 2016 and 2020! The rapid explosion of the cannabis industry
is taking the investing world by storm. But can this high last forever, or will it soon
burn out? How did cannabis become illegal anyway? For
thousands of years, cannabis was considered a common, useful medicine to aid with a large
array of ailments and pains. But all that changed following the 1910 Mexican Revolution,
which resulted in a new wave of Mexicans immigrating to the U.S. to seek a better life. The suspicion and fear of these immigrants
extended to their tradition of smoking cannabis. American law enforcement demonized the drug
as a inciter of crime and violence and rebranded it under its scary, foreign-sounding name:
Marijuana. States quickly began regulating and outlawing
the use of “marijuana,” and by 1970, the Federal Government passed a law making it
a schedule-1 drug, meaning, according to the DEA, it’s more dangerous than cocaine or
methamphetamines and has zero medical benefits. Our prisons are still crowded with inmates–disproportionately minorities– whose initial offenses were related to cannabis. For most of the 20th century, the majority
of Americans believed that marijuana should be outlawed. But today, popular and legal
sentiment has turned to favor cannabis once again. It might remind you of when, a hundred
years ago, another big swing happened to a popular recreational drug: alcohol. In 1933, the 21st Amendment repealed Prohibition
– the 13 year long period in our nation’s history when the production or sale of alcohol
was illegal. This was partly a reaction to popular sentiment, but it’s also because
the Feds were looking for an economic stimulant, and they saw the potential of harvesting the
taxes from legal alcohol sales. Their bet paid off – big time. Alcohol production exploded,
and within a year of repeal, the alcohol tax income added 9% to the entire Federal Budget! See, banning alcohol didn’t stop people
from drinking. They just found creative work-arounds, and a black-market was created that benefited
organized crime. By legalizing alcohol, the government could spend less time chasing bootleggers
and more time collecting tax revenue. These same arguments are being made today for cannabis. There are a few key differences between legalized
marijuana and Prohibition. Cannabis production and possession has been criminalized for much
longer than alcohol ever was- none of us lived in a time when the drug was fully legal. And
while some states allow legal production, the federal government still doesn’t. This
leaves cannabis in a legal haze — The Federal government seems to defer to the states rights
and not enforce the standing law… for now. As money floods in to this blooming market,
cannabis companies are sprouting like weeds; Together, they’ve had an estimated economic
impact of 16 Billion dollars in 2017 alone, with total U.S. revenue approaching that of mega corporations like Netflix and McDonald’s. And in 2017 the industry employed around 150,000
full time workers, which is roughly the same number of librarians or kindergarten teachers in the
country. And remember, these figures are from 2017, before California had even legalized cannabis for recreational use. They’re probably much, much “higher” today. Now, before you buy in to this cushy new lifestyle,
some blunt truths: It might be an exciting new field, but all of the same rules of the
stock market still apply. Investing in single-company stocks inherently carries what experts call
“unsystematic risk”. That means that even though a sector may grow over-all, individual companies
might be half-baked. Consider the dot-com boom of the early 2000’s. Though the internet
was clearly here to stay, countless start-ups with doobie-ous business plans failed and
their investors’ dollars went up in smoke. The same can be said of any exciting new trend,
like 3D printing or cryptocurrency. You can avoid unsystematic risk by diversifying
your stash. For example, instead of selecting individual stocks, you might look into a cannabis-comprised mutual fund or ETF, which rolls up hundreds of different holdings into one entity. You
can reefer to our episode on mutual funds for a deeper dive, but the basic premise is
that you get the benefit of investing in a certain sector, while spreading your risk
across multiple companies. But buying a fund isn’t a sure-fire bet
either. Since the industry is new, cannabis companies are primarily small-cap,
which means their risk of failure is especially high. So it’s not surprising that these
funds are subject to wild swings. Trail-blazing industries tend
to suffer from fits and starts, and this one is no different. A single court ruling or
new law might reshape the landscape overnight. Even a potential green-gold-mine like legalized
cannabis is subject to the laws of supply and demand. Take Oregon, which legalized cannabis
sales in 2014, where a flood of speculators eager to cash in has led to a massive over-supply.
According to the Associated Press, there are over a million pounds of dried cannabis in
the Oregon supply system with no way to profitably dispose of it. This has led to a collapse
of prices, with a drop of 50% in the price per ounce since 2015. Talk about a buzz-kill. It looks like legal cannabis is here to stay
for the foreseeable future. Before you place a big bet on these companies, it’s critical
you have a sound grasp of equity-investing fundamentals, like market size, P/E ratios,
volatility. If you’re unfamiliar with these concepts,
you should start by seeking the guidance of an investment advisor who’s a legal fiduciary.
Together you can hash out a plan to realize your financial goals. As with any speculative investment, no matter
how exciting, never gamble more than you’re willing to lose if things go to pot.. And that’s our two cents! Have you invested in cannabis production or any other emerging industry? Tell us about it in the comments.

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