As a financial advisor, marijuana was the last topic I ever thought I’d find myself writing about.
But I can’t deny it is the investment I am asked about more often than any other these days. It gets a huge amount of attention from legitimate financial media outlets, and seems like every day you hear of pot stocks soaring higher than the end consumers that are fueling this “green rush.” How was that for a corny weed joke? I’m turning into my dad I guess…
We’ve been hearing a lot about marijuana around the office lately, and from the last people you’d expect. The last two people who asked me about investing in marijuana stocks were women over the age of 80 who I am almost certain have never tried marijuana themselves. Welcome to reefer madness 2.0.
With more and more states and even our friendly neighbors to the north legalizing, marijuana is looking more and more like an obvious investment with seemingly unlimited potential for growth. The recreational market is huge and expanding. The medical applications to treat or at least provide relief to people with serious chronic illnesses are astounding, and who knows how many more will be found as time goes on.
But it is also a hype machine, something that could perhaps be soaring on expectations from investors that, much like tech stocks in the early 2000s, Bitcoin in late 2017, are sky high and could lead to disappointment.
Investment manias like this, though exciting, always concern me as a financial advisor. Though I always struggle to talk my friends out of investing in an exciting new marijuana stock out of fear that they will watch it double in price the next week, I thought I should at least put together my thoughts on the matter.
You can’t simply invest in “legal marijuana”
At this point, there isn’t really a good way to get diversified exposure to the marijuana industry at large. Though we are just now seeing the beginning of pot-themed ETFs, most only include 30 or so companies and are highly concentrated in their largest holdings.
That leaves most people doing it the old fashioned way – picking stocks. But individual companies are vulnerable to mismanagement or competition from within the industry – even if things go well for legal marijuana, they may not for your stock pick. And though undoubtedly there will be winners and fortunes made in the new green industry, how can anyone at this point be certain they are buying the next Facebook and not the next Myspace?
What could possibly go wrong?
I feel like many investors in weed stocks have their eyes on a quick windfall and ignore the fact that any new industry is going to experience growing pains that could impact their investment or the industry at large. Demand is already failing to live up to expectations in certain legal markets which is resulting in worrisome overproduction and price compression. At the beginning of this year, it was discovered that producers in Oregon were sitting on a stash of 1.3 million pounds of weed they can’t sell, not a surprise considering people in Oregon are consuming less than 375,000 pounds of it each year.¹
Threats from within the industry, combined with those from outside – such as pharmaceutical companies synthesizing the same compounds found in cannabis and taking the growers and processors out of the equation, could be headwinds to the industry that nobody ever seems to think about when investing. The focus always seems to be on how many more state are legalizing and how the market is expanding, information everyone already knows, and that is clearly already incorporated into market prices.
But what I find even more concerning is that industry insiders and less conscionable financial folks may use this hype to fleece main street investors of their hard earned money by selling them terrible investments they don’t understand. Case in point, the “High Times” IPO, which is being promoted to investors despite the company being overrun with debt and losing money with no end in sight.
This is not to say that all marijuana investments are being created with bad intentions, or will not benefit investors. I am simply trying to bring up the unfortunate fact that an environment of hype around a certain industry like this can sometimes bring those type of things out. A rising tide lifts all boats. It also lifts up all the garbage.
Investment manias like Bitcoin in late 2017, tech stocks in the early 2000s, all the way back to the tulip mania in 1637 have had one thing in common: they didn’t end well for the typical, “main street” investor.
Though I see a much greater likelihood of disappointment than success by picking pot stocks to invest in a marijuana industry still in its infancy, I do sincerely hope everything works out well for the green rush and its participants.
I hope to one day own “pot stocks” as part of a low-cost, globally diversified investment portfolio of thousands of companies. With companies like Vanguard, who has already started to include cannabis stocks in one of their index funds, getting involved, it won’t be long.
Paul R. Ruedi, CFP® is a financial advisor at Ruedi Wealth Management in Plano, Texas.
Paul has been quoted in news publications including USA Today, Forbes, The New York Times, Dallas Morning News, Inc.com, Business Insider, US News and World Report, GoBankingRates, The Street, NerdWallet, and The Penny Hoarder. He also writes articles that have been featured in CNBC, Investopedia, Yahoo Finance, Nasdaq, and MSN Money. He was named one of Investopedia's Top 100 Most Influential Financial Advisors in 2018.