Market regulators are expressing concern amidst what began as a small outbreak in 2015 and quickly spread across North American stock markets. Trading volumes are 10 times that of established blue-chip companies and stock prices have skyrocketed upwards of 3000%. The resulting mania has left many experts worried that cannabis stock addiction has bloomed into a full-blown epidemic.
FACTORS DRIVING THE ADDICTION
- Everybody’s Doing It – CBC reported that a Forum Research poll from 2015 indicates that over 30% of Canadians would smoke marijuana if it were legal, making the supply side of the equation very attractive. Some estimate marijuana could generate as much as 6 billion dollars for the Canadian economy, placing it in line with alcohol sales.
- It Will Make You Popular – The mass media continues to provide daily updates on cannabis stocks, adding credibility to valuations, and leaving non-investors feeling like the only ones not invited to the party.
SOBERING FACTS
Price growth has been primarily fueled by speculation. As an illegal industry, cannabis had very little in terms of official data to properly evaluate supply, sales, and pricing trends. Now that cannabis is legal, companies like Canopy Growth, Aphria and Aurora will have to demonstrate that they can generate profits in line with their valuations. And that may not be so easy.
Cannabis companies have very high valuations, however there numerous questions around rules, regulations and distribution that could impact how, if at all, profitable these companies may become.
Other risks include:
Low Barriers to Entry: Currently the barriers to entry into this business are very low. As profits increase there may be a plethora of new competitors in this space.
Regulatory Uncertainty: The government has yet to provide guidance on a number of marijuana-based products (eg approved consumables) and consumption rules.
The Black Market: With no taxes, the black market continues to retain a price advantage and is a potential threat to profits.
3 RULES FOR INVESTING IN CANNABIS STOCKS
The world has seen a number of speculative bubbles over the years, including dotcoms, beanie babies, crypto currencies and even cryptokitties (they’re real – one recently sold for $170,000).
There may be a solid business case for buying into cannabis companies, but as with any speculative investment, individuals should remain focused on the big picture with respect to their savings.
Follow 3 simple rules:
1. Don’t Give in to Peer Pressure
Missing out on market gains may leave you feeling left out. The temptation to be a part of the rally may be overwhelming, but remember that these stocks have already generated huge returns. There is no guarantee the ride will continue and, in fact, a correction could be a more realistic probability.
2. Buy in Moderation
These companies have yet to prove they can become profitable in the long term. There still remains questions on how technology, valuations and new rules will play out for companies in this space. If you are considering buying cannabis stocks, be sure to only use money that you can afford to potentially take a loss on.
3. Admit When You Have a Problem
If you have already invested on cannabis stocks and are considering adding more of your retirement savings or “safe” money into them, remind yourself of your long-term goals and what you can really afford to risk. Remember that the memory of the market high can be more addicting than the high itself and lead to irrational decisions.
It may feel like a buzzkill, but investing for the long-term means holding a conservative and diversified portfolio. There is nothing wrong with allocating a small portion of your portfolio into certain speculative investments, but always ensure you can stomach the volatility and/or potential losses.