What do Snoop Dogg, Gwyneth Paltrow, and ex-Speakerof the House John Boehner all have in common? Besides their Spotify Discover Weekly playlists.
They’re all major investors in a buddingnew industry – legalized cannabis production.
Once a taboo topic, pot is going mainstream.
A 2018 Pew Research Poll found that 62% of Americans believe marijuana should be legalized- the highest number in the last 50 years.
With the recent law changes in Canada andsome U.
states, the legal winds seem to be shifting for cannabis.
And nothing helps fan the flames of changelike the prospect of making some serious green.
A 2018 research study projected medical marijuanasales to grow by 36% per year, making it a 55 billion-dollar industry by 2024.
And CBD, a derivativeof cannabis, was projected to grow by 700% between 2016 and 2020! The rapid explosion of the cannabis industryis taking the investing world by storm.
But can this high last forever, or will it soonburn out? How did cannabis become illegal anyway? Forthousands of years, cannabis was considered a common, useful medicine to aid with a largearray of ailments and pains.
But all that changed following the 1910 Mexican Revolution,which resulted in a new wave of Mexicans immigrating to the U.
to seek a better life.
The suspicion and fear of these immigrantsextended to their tradition of smoking cannabis.
American law enforcement demonized the drugas a inciter of crime and violence and rebranded it under its scary, foreign-sounding name:Marijuana.
States quickly began regulating and outlawingthe use of “marijuana,” and by 1970, the Federal Government passed a law making ita schedule-1 drug, meaning, according to the DEA, it’s more dangerous than cocaine ormethamphetamines and has zero medical benefits.
Our prisons are still crowded with inmates–disproportionately minorities– whose initial offenses were related to cannabis.
For most of the 20th century, the majorityof Americans believed that marijuana should be outlawed.
But today, popular and legalsentiment has turned to favor cannabis once again.
It might remind you of when, a hundredyears ago, another big swing happened to a popular recreational drug: alcohol.
In 1933, the 21st Amendment repealed Prohibition- the 13 year long period in our nation’s history when the production or sale of alcoholwas illegal.
This was partly a reaction to popular sentiment, but it’s also becausethe Feds were looking for an economic stimulant, and they saw the potential of harvesting thetaxes from legal alcohol sales.
Their bet paid off – big time.
Alcohol production exploded,and within a year of repeal, the alcohol tax income added 9% to the entire Federal Budget! See, banning alcohol didn’t stop peoplefrom drinking.
They just found creative work-arounds, and a black-market was created that benefitedorganized crime.
By legalizing alcohol, the government could spend less time chasing bootleggersand more time collecting tax revenue.
These same arguments are being made today for cannabis.
There are a few key differences between legalizedmarijuana and Prohibition.
Cannabis production and possession has been criminalized for muchlonger than alcohol ever was- none of us lived in a time when the drug was fully legal.
Andwhile some states allow legal production, the federal government still doesn’t.
Thisleaves cannabis in a legal haze — The Federal government seems to defer to the states rightsand not enforce the standing law… for now.
As money floods in to this blooming market,cannabis companies are sprouting like weeds; Together, they’ve had an estimated economicimpact of 16 Billion dollars in 2017 alone, with total U.
revenue approaching that of mega corporations like Netflix and McDonald's.
And in 2017 the industry employed around 150,000full time workers, which is roughly the same number of librarians or kindergarten teachers in thecountry.
And remember, these figures are from 2017, before California had even legalized cannabis for recreational use.
They're probably much, much "higher" today.
Now, before you buy in to this cushy new lifestyle,some blunt truths: It might be an exciting new field, but all of the same rules of thestock market still apply.
Investing in single-company stocks inherently carries what experts call“unsystematic risk”.
That means that even though a sector may grow over-all, individual companiesmight be half-baked.
Consider the dot-com boom of the early 2000’s.
Though the internetwas clearly here to stay, countless start-ups with doobie-ous business plans failed andtheir investors’ dollars went up in smoke.
The same can be said of any exciting new trend,like 3D printing or cryptocurrency.
You can avoid unsystematic risk by diversifyingyour stash.
For example, instead of selecting individual stocks, you might look into a cannabis-comprised mutual fund or ETF, which rolls up hundreds of different holdings into one entity.
Youcan reefer to our episode on mutual funds for a deeper dive, but the basic premise isthat you get the benefit of investing in a certain sector, while spreading your riskacross multiple companies.
But buying a fund isn’t a sure-fire beteither.
Since the industry is new, cannabis companies are primarily small-cap, which means their risk of failure is especially high.
So it’s not surprising that thesefunds are subject to wild swings.
Trail-blazing industries tendto suffer from fits and starts, and this one is no different.
A single court ruling ornew law might reshape the landscape overnight.
Even a potential green-gold-mine like legalizedcannabis is subject to the laws of supply and demand.
Take Oregon, which legalized cannabissales in 2014, where a flood of speculators eager to cash in has led to a massive over-supply.
According to the Associated Press, there are over a million pounds of dried cannabis inthe Oregon supply system with no way to profitably dispose of it.
This has led to a collapseof prices, with a drop of 50% in the price per ounce since 2015.
Talk about a buzz-kill.
It looks like legal cannabis is here to stayfor the foreseeable future.
Before you place a big bet on these companies, it’s criticalyou have a sound grasp of equity-investing fundamentals, like market size, P/E ratios,volatility.
If you’re unfamiliar with these concepts,you should start by seeking the guidance of an investment advisor who’s a legal fiduciary.
Together you can hash out a plan to realize your financial goals.
As with any speculative investment, no matterhow exciting, never gamble more than you’re willing to lose if things go to pot.
And that’s our two cents! Have you invested in cannabis production or any other emerging industry? Tell us about it in the comments.