Experienced traders all have their horror stories about how they tried to fight the market or how they placed a bad bet on a hunch. On the other hand, those who survive and thrive all have similar stories about how they listened to the conventional wisdom and found a way to apply it to their investment goals.
Cannabis and marijuana stocks are still very new to the market. Because of the widespread appeal and potential for recreational marijuana, investing in weed stocks has a high likelihood of spawning a bubble similar to the one that created the crash of 2000. Exuberance is not a substitute for prudent, disciplined investing, nor is potential a substitute for good financial fundamentals. Here are some things to consider if you are planning to invest in this sector of the market
Are You Prepared for Risk Capital?
Because of the uncertain legal climate, most marijuana stocks have yet to emerge from small-cap status. In fact, the two largest issues, Canopy Growth Corporation and The Cronos Group, are penny stocks, which are primarily traded on an over-the-counter basis. This means that any investment in marijuana stocks should be treated like any other small-cap investment. Volatility is likely, and any capital invested should be risk capital that the investor is willing to tolerate losing.
Investors seeking diversification should make themselves aware which sector their marijuana stock actually occupies. For example, if the stock is a “plant-touching” business, that would be an agricultural play. A company that operates a series of retail stores and dispensaries would be better classified as a retail investment. If your portfolio is heavily weighted in a particular category like agriculture, you may want to reconsider making an investment in a plant-touching marijuana stock in the interests of preserving your diversification across industries.
For those intending to invest heavily, it might also be prudent to diversify within the marijuana space by buying retail, agricultural, and pharmaceutical shares in equal proportion. This can be a strategy to hedge against the general legislative uncertainty at both the state and federal level.
What’s the Long Term Goal?
True believers are going to be happiest with a buy and hold strategy. The reason for this is fairly obvious and is no different from the tech boom of the 1990s. The breakout event will be the legalization of marijuana in the United States at the federal level. If and when that takes place, the dam will burst and investors will pour into the sector. Penny stocks will rapidly become small cap and then mid-cap stocks, especially when institutional investors begin allocating their client’s capital.
While this is technically an example of “timing the market,” it is a unique situation given the legislative future. That said, accumulating shares of the penny stocks is a long term play with a credible goal that could result in much higher than average returns. As long as the rest of any given investor’s portfolio is properly diversified and hedged against the additional risk, it is at the very least something worth considering.