The cannabis sector has been a hot market in recent years. The potential to double or even triple our investment often overshadows the risk and uncertainties embedded in the industry. So is cannabis investing a good idea?
Ultimately it depends on the investor as we all have varying financial goals and risk appetites. Nevertheless, it’s important we delve deeper into some of the myths and realities around cannabis investing to make an informed decision.
Reality: The cannabis business is more than growing and selling marijuana products
Growing and selling is usually the type of business people think of when investing. However, there are a number of businesses that aren’t involved in the cultivation and distribution of cannabis directly, making it possible to invest in opportunities outside of this area.
The industry includes businesses in agriculture technology and biotechnology. Agriculture technology is based on developing and improving equipment used to grow cannabis, such as better lighting systems. Biotechnology focuses on the substance’s medicinal qualities to combat illnesses and diseases.
There’s also consulting services that help businesses deal with the evolving rules and regulations between different jurisdictions and issues with zoning, licensing and operational procedures. A full list can be found here.
Reality: Investing in marijuana stocks is risky
It’s tempting to jump onto the cannabis bandwagon when stock prices have risen significantly over the last couple of years. But as attractive returns have been, we must be mindful of the high risk involved.
The industry is still in its infancy and most companies have not made a profit. Instead they base their success on future distribution and sales. However, it’s difficult to predict future success especially when complex cannabis regulations continue to change and force companies to adapt.
With that said, high stock prices are usually based on growing interest and future expectations about the business instead of current performance. In certain cases, companies that simply announce their intent to get into the industry have seen their stock price go up, without having established any businesses.
Given the speculative nature of the business, cannabis investing is not for everyone. For example, an investor with a low risk tolerance and looking for stable income may want to avoid marijuana stocks since the chances of losing money is high. Over the last couple of years, cannabis stocks have experienced large price fluctuations over a short period of time. Prices have almost doubled in a span of months while also losing more than twice its value over the same time frame. So if you decide to invest in marijuana stocks, you should expect to see large price swings where high returns may be offset by larger losses.
Myth: Cannabis investors are not allowed to travel to the U.S.
Following Canada’s legalization of cannabis, the U.S. Customs and Border Protection (CBP) released a statement that Canadians working, investing or participating in the cannabis industry could be found inadmissible and face a lifetime U.S. travel ban given the substance is illegal under federal law.
However, the CBP later clarified their stance (full statement can be found here):
“A Canadian citizen working in or facilitating the proliferation of the legal cannabis industry in Canada, coming to the U.S. for reasons unrelated to the cannabis industry will generally be admissible to the U.S. however, if a traveler is found to be coming to the U.S. for reason related to the cannabis industry, they may be deemed inadmissible.”
In other words, cannabis investing shouldn’t hinder future trips to the US depending on the purpose of travel. For example, if you’re a SnowBird that holds a few marijuana stocks in your investment portfolio, you probably won’t have any issues getting into the US if you’re going for vacation. But if you work in the industry and are planning to attend a cannabis conference, you may be denied entry and face potential travel bans. The CBP states that as long as the purpose for travelling is deemed “related to the cannabis industry”, a traveller faces a potential ban even if travelling to a state where cannabis is legal.
Now that we’ve gained some insight on cannabis investing, there’s a wide range of resources we can use to continue learning about the industry. Publicly traded cannabis companies are required to provide disclosure documents such as the prospectus, which contains valuable information on the business, operations and associated risks. There are also company materials that include financial statements and management commentaries on company performance and trends that may affect their operations.
You can also speak to a financial advisor because though high returns are attractive, an advisor can assess its suitability and whether it’ll help you achieve your financial goals. And that of course, should always be the priority.