What do Snoop Dogg, Gwyneth Paltrow, and ex-Speaker of the House John Boehner all have in common?
Besides their Spotify Discover Weekly playlists.
They’re all major investors in a budding new 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 and some U.S. states, the legal winds seem to
be shifting for cannabis.
And nothing helps fan the flames of change like the prospect of making some serious green.
A 2018 research study projected medical marijuana sales to grow by 36% per year, making it a
55 billion-dollar industry by 2024. And CBD, a derivative of cannabis, was projected to grow
by 700% between 2016 and 2020!
The rapid explosion of the cannabis industry is taking the investing world by storm. But
can this high last forever, or will it soon burn out?
How did cannabis become illegal anyway? For thousands of years, cannabis was considered
a common, useful medicine to aid with a large array 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.S. to seek a better life.
The suspicion and fear of these immigrants extended to their tradition of smoking cannabis.
American law enforcement demonized the drug as a inciter of crime and violence and rebranded
it under its scary, foreign-sounding name: Marijuana.
States quickly began regulating and outlawing the use of “marijuana,” and by 1970, the
Federal Government passed a law making it a schedule-1 drug, meaning, according to the
DEA, it’s more dangerous than cocaine or methamphetamines 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 majority of Americans believed that marijuana should
be outlawed. But today, popular and legal sentiment has turned to favor cannabis once
again. It might remind you of when, a hundred years 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In 1933, the 21st Amendment repealed Prohibition - the 13 year long period in our nation’s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 alcohol was illegal. This was partly a reaction to
popular sentiment, but it’s also because the Feds were looking for an economic stimulant,
and they saw the potential of harvesting the taxes 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 people from drinking. They just found creative work-arounds,
and a black-market was created that benefited organized crime. By legalizing alcohol, the
government could spend less time chasing bootleggers and more time collecting tax revenue. These
same arguments are being made today for cannabis.
There are a few key differences between legalized marijuana and Prohibition. Cannabis production
and possession has been criminalized for much longer than alcohol ever was- none of us lived
in a time when the drug was fully legal. And while some states allow legal production,
the federal government still doesn’t. This leaves cannabis in a legal haze -- The Federal
government seems to defer to the states rights and 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 economic impact of 16 Billion dollars in 2017 alone,
with total U.S. revenue approaching that of mega corporations like Netflix and McDonald's. And
in 2017 the industry employed around 150,000 full time workers, which is roughly the same number of
librarians or kindergarten teachers in the country.
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 the stock 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 companies might be half-baked. Consider the dot-com
boom of the early 2000’s. Though the internet was clearly here to stay, countless start-ups
with doobie-ous business plans failed and their 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 diversifying your 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. You can reefer to our episode on mutual funds
for a deeper dive, but the basic premise is that you get the benefit of investing in a
certain sector, while spreading your risk across multiple companies.
But buying a fund isn’t a sure-fire bet either. 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 these funds are subject to wild swings.
Trail-blazing industries tend to suffer from fits and starts, and this one
is no different. A single court ruling or new law might reshape the landscape overnight.
Even a potential green-gold-mine like legalized cannabis is subject to the laws of supply
and demand. Take Oregon, which legalized cannabis sales 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 in the Oregon supply system with no way to profitably
dispose of it. This has led to a collapse of 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 stay for the foreseeable future. Before you place
a big bet on these companies, it’s critical you 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 matter how 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.