Investing in the Cannabis Market

Cannabis plants

The cannabis market is serving as a reminder of some basic investment principles

21/03/2019

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Perhaps not since the dot com boom of the 1990s have we seen the kind of investor interest in a sector that we’re now seeing in the marijuana market. Seasoned investors and newcomers alike are excited by the prospects of this nascent market and risk is rampant. In the months leading up to, and the four months following legalization in Canada, there has been huge volatility in stock prices for some of the major players and the valuations of many of these companies is often characterized as ‘out of whack’. For instance, market leader Tilray (TSX:TLRY) was valued greater than American Airlines Group in September 2018. That is high! (Pun intended)

So, if you’re looking to add marijuana stocks to your portfolio, there’s a lot to take in at the moment. It’s not easy to keep on top of the news of mergers, partnerships, earnings reports and growth forecasts in an emerging sector, and you could find yourself caught up in the hype. So first and foremost, it’s good to work with a trusted investment advisor. An advisor can help to put disclosure documents in perspective and assist in choosing an investment that suits your financial goals. Even if you are an experienced investor, accustomed to doing your own research and trades, having an advisor to confirm or correct your strategies, even just initially, could help you avoid some costly mistakes. There are plenty of articles on the value of an advisor, and how to find one, so that’s not a topic we will cover in depth here.

Investor or Speculator?

Warren Buffet’s mentor, Benjamin Graham believed it was crucial to determine whether you are acting in the market as an investor or a speculator. The distinction is fairly simple. As an investor, you buy a stock in a company you believe will be successful and that stock represents ownership in the company. You have a stake in the future of that company. As a speculator, your only concern is what someone will pay for that stock down the line.

Some would argue that all investment is a combination of the two but it’s an important differentiation to make when you are working with an emerging market sector. It allows you to clarify your expectations and often, the timeline for your ROI and the amount of risk you are prepared to take.

It’s important to remember that marijuana is a commodity – plain and simple. And as a commodity it is subject to the same booms and busts as other commodities. As an agricultural commodity it holds additional risks. Think of all the uncertainties of growing any crop – the introduction of a single pest can wipe out an entire harvest.

Consider Ancillary Products and Players

There are opportunities beyond investing in producers of marijuana and if you’re considering investing in this sector, you may want to look beyond the obvious. Certainly Biotech stocks have been around for decades but with more and more information available regarding the medical uses of cannabis, there will be expanded opportunities for companies to develop drugs and treatments for various diseases, conditions and illnesses. For instance, creams and oils derived from CBD, the non-intoxicating compound of the marijuana and hemp plants, have shown great promise in the treatment of epilepsy and arthritis.

AgTech companies who are developing innovations and technologies that support or enhance the cultivation of marijuana are another option. A great many companies have sprung up around this industry. While some of these technologies are obvious such as lighting and irrigation, others are more subtle. For instance, scientists have identified 66 distinct cannabinoids, 120 turpenes and 21 flavinoids in marijuana. All of these compounds contribute to the overall effect of marijuana as a medicine. So there are companies that specialize in extraction technologies. These same technologies can be put to use in testing and certification of crops. Mechanized harvesting equipment is another AgTech area where we may see some growth.

Another peripheral industry, though rather crucial, is the development and manufacture of consumption devices. It may surprise some to learn the panoply of products that already exist in this area. Bongs, vapes, pens, dab equipment, transdermal patches, tinctures, oils, distillates…if these terms aren’t familiar to you now, they may soon be. There’s a whole range of equipment and substrates for consuming marijuana, both medicinally and recreationally, that is sure to see a lot of activity. And that doesn’t even take into consideration what many feel to be the future of cannabis – edibles.

Bottom line

If you don’t yet know the difference between CBD and THC, you have more homework to do before you invest in the cannabis industry. Information is always key to intelligent investing (or speculating) and never more so than in a new and developing market sector. We have to consider the ever-changing regulatory laws, taxation, emerging competition, a growing (or shrinking) market and the basic supply chain logistics. There’s a lot of moving parts. We don’t have the luxury of history here. But there are some parallels. As mentioned previously, there are lessons to be learned from the dot com boom. If, as investor, we all follow the leader, this can and will lead to a bubble that will eventually burst. Arguably, this has already happened with some company valuations. Keeping yourself informed and you’ll find your way through the smoke.

This article was originally published on the Financial Independence Hub

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