Many investors have asked me this question, which is definitely expected, and the answer varies from person to person. Through my own experience, I have come to the conclusion that there are two groups of investors in this emerging industry. The first group believes that marijuana will be fully legalized soon and recognize the benefits of its decriminalization. The other group sees opportunities with increased legalization, but are hesitant to invest until changes are made at the federal level. The latter group represents the minority share of total number of investors, but the majority of the capital. These include broker-dealers, institutional investors, mutual fund companies and multitudes of high net worth investors.
Let’s be real, you’re not investing in a value stock.
First things first, you are investing in developmental companies that are naturally speculative in nature. However, with big risk comes big reward. For the investors who believe in this industry and can stomach the risk, the number one thing I can recommend is to be selective and look extensively into the company prior to investing. We recommend carefully considering factors such as:
- What exchange does the company trade on?
- How many shares are outstanding and what is the company’s dilution potential?
- Who makes up the company’s executive board and what is their track record?
- Is the company generating revenue?
- Is the company taking steps to capitalize on growth opportunities?
What are the risks to investing in publicly traded cannabis companies?
- Natural Disasters
- Gasoline going to $150 a barrel
- Federal Government defaulting on Debt
- Real Estate Market collapse
- Federal Government chooses to enforce marijuana laws, irrespective of state legislation
Only risk #7 is specifically related to investors in the cannabis industry. The first 6 risks are inherent to investing in any company, in any industry.
What are the chances that the federal government begins to enforce federal marijuana laws (in other words, illegal) in legalized states?
Very slim, less than 1%. The following is why we’re so confident in this:
- The US House of Representatives recently passed a landmark bill that prevents the DEA from pursuing and shutting down marijuana operations in states where it is legal (whether medically or recreationally). This bill removed much of the fear that prevented business owners and entrepreneurs from entering the industry. Similar measures have failed to pass the House six times since 2003, but the tide is different in today’s world, and we expect the government to abide by the contents of this bill.
- More than 60% of states have passed, or are waiting to sign, bills that legalize cannabis at some level, whether medically or recreationally.
- The recently passed “Farm Bill” has enabled many industries to utilize hemp as a cheap alternative resource.
- In a survey done by WebMD & Medscape in April 2014, 69% of doctors believe that marijuana can help with certain treatments and conditions and 50% of doctors in states where it is not legal said that it should be legal.
- The number of people that use or support the use of medical marijuana has increased significantly over the past decade.
- The use of marijuana has become socially acceptable, with the past three presidents even admitting to having smoked it (yes, “not inhaling” it still counts, President. Clinton).
- Many states are currently facing budget problems and see the potential for tax revenue generation. Colorado is a perfect example of the tax revenue potential.
- High net worth, affluent investors, such as George Soros and Peter Lewis, have begun to invest and openly support legalization.
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