Investing in Cannabis Market Pros and Cons

The public markets have one big advantage in general: Liquidity.  One can buy and quickly sell if one changes one’s mind or wants to take a quick gain (or loss). There also is often more information available on publicly-traded companies. The main challenge for investing in publicly-traded cannabis stocks is that they don’t really represent the industry.  Most, not all, of the almost 400 companies that I track are not likely to ever be successful, and many are outright frauds.  The vast majority of the public stocks trade on the OTC and not the NYSE or NASDAQ, and this is problematic because it excludes institutional investors.

Private companies have poor liquidity. When one invests, it can take years to exit. Typically a successful company will be acquired or go public, allowing the investor to cash out, but this can take quite some time.  If the company is unable to hit its targets and runs out of money, then one’s stake can be diluted.  While the lack of liquidity is a challenge, private companies can offer much better valuations.  Additionally, there is some institutional involvement in private companies. While often the institutional funds themselves are unable to invest, the people running them sometimes do.  There are also some funds that specialize in investing in the cannabis industry.

If one is going to invest in publicly-traded companies, then one is likely on one’s own for the most part, as there are no mutual funds or ETFs available yet.  Investing in individual stocks requires that one open a brokerage account, and, believe it or not, some brokers won’t allow cannabis investments or restrict their customers. Thus, it’s important to find a broker that will allow one to transact. Another consideration is that Canada has rapidly become one of the best opportunities in the cannabis sector, so having the ability to trade in Canada is an important consideration. If one is investing in cannabis stocks, a resource to incorporate would be, as most of the stocks trade on the OTC. Seeking Alpha is one of a handful of financial sites that has content on cannabis stocks occasionally. Some other free resources would include The Money Show, which hosts virtual conferences several times a year. The Cannabis Investor Webcast, which takes place monthly and includes presentations by several public and private companies, is another option. There are not a lot of resources for individual investors who need assistance. 420 Investor, which I founded three years ago, is the most comprehensive due diligence platform, with a community of engaged members.  The service includes news alerts, analysis, model portfolios, ten videos per week, a forum and a weekly chat.

For those who want to invest in private companies, there are a few funds, though with limited operating histories. One such firm is Poseidon Asset Management, headed by brother-and-sister Morgan and Emily Paxhia. Another resource is The Arcview Group, which offers not only an angel investing group but also market research. New Cannabis Ventures profiles many of the leading private companies in the industry, including some of which are our clients.

Whether one invests in public or private companies, it is essential to follow the industry closely. New Cannabis Ventures aims to help investors stay on top of key trends and highlights leading companies, both public and private, as well as influential investors in the industry.

A really interesting opportunity next month takes place in San Francisco, the New West Summit, which focuses on technology, media and investing. Readers of New Cannabis Ventures can save 50% on admission for a limited time.

I have been following the cannabis industry since early 2013 and continue to do so because it does represent a great investment opportunity despite a lot of challenges. While there will be a lot of hype in front of the elections and perhaps beyond, there is no reason to rush into any investment. It is more important to understand the industry and to gain the ability to pick the management teams and opportunities that one thinks will succeed. If you have any questions, feel free to reach out.