Thoughts On Cannabis Investing
One way to make a small fortune is to invest a large fortune in a risky and emerging industry such as the US cannabis industry. The emerging market for legal cannabis in the US is highly risky and will remain so for a long time.
First there is the normal risk of any new line of business. But the cannabis industry comes with enormous regulatory risk and litigation risk. Note the tremendous money being lost by legal manufacturers of opioids from lawsuits by various states and other entities. Can a society upset about plastic straws really be trusted to treat the cannabis industry fairly when the pendulum swings back in opposition to cannabis?
I suspect that most of the major returns from cannabis have already been received by early shareholders. Investors interested in cannabis have three major choices:
- Large companies such as Altria or Anheuser-Bush In Bev,
- Small public companies such as Canopy Growth and Aurora Cannabis, or
- Private deals.
Note that most investors probably already have some exposure to cannabis through major mutual fund indices (perhaps within their retirement plans) that hold the first category of cannabis investments (large listed firms).
Small listed cannabis firms offer investors a chance to time the returns of the overall cannabis industry and to try out their stock-picking abilities. I am opting out of this path because of my concern with regulatory and litigation risk. It is one thing to lose money because I picked the wrong firm. It is another to lose money because of massive awards by juries or fines by government.
The last category (private deals) is fraught with danger. Private partnerships are notorious for their high fees and unkind treatment to outside investors. While such deals probably offer some of the best opportunities, they also offer many of the worst – and telling them apart is not easy.
So, long story short, unless you have a special gift for picking small stocks or unique access to stellar private deals, perhaps the best was to enjoy cannabis investing is to hold highly diversified equity mutual funds that contain small slices of the cannabis industry.