Embracing the highs and lows of cannabis investing

When it comes to investing risks and opportunities, there is currently nothing quite like cannabis.

While its recreational use is still illegal at the federal level, the momentum behind a push to regulate marijuana alongside alcohol is unmistakable.

Since Colorado and Washington set the pace in 2012 by making cannabis legal for recreational use, nine other states have followed suit. Marijuana has been decriminalized in 15 states and it’s legal for medical use in 47 states.

In layman’s terms, at the federal level, one could say marijuana is less illegal than it is frowned upon.

There are currently four proposals before Congress that present various ways of decriminalizing pot at the federal level, which would, or at least should, open the floodgates for investment opportunities.

Until then, despite the availability of some easy entry points into the space, financial advisers, being the responsible adults that they are, have generally shunned the opportunity to jump on the pot bandwagon.

“Because the federal rules haven’t changed, LPL and the bank I work for won’t allow us to touch cannabis companies,” said Dennis Nolte, vice president at Seacoast Investment Services.

“We certainly can’t recommend them, and until the federal laws change, I don’t see this changing,” he added. “My bank won’t even lend to cannabis-oriented companies.”

It’s impossible to know how investors and financial advisers might respond to a similar investment opportunity that didn’t involve a psychoactive drug known for promoting the munchies. But when it comes to research, I’m betting most advisers could more easily explain cannabis than bitcoin or semiconductors.

Kristi Sullivan, owner of Sullivan Financial Planning, acknowledged the potential upside of “getting in on the growth floor of an entirely new industry,” but gets stuck by her focus on those pesky federal laws.

“The current laws make it very expensive to tap into banking services, and taxes are extremely high for pot businesses,” she said. “This can shrink margins or make profitability difficult for all but the largest players.”

All good points, but what most responsible law-abiding financial professionals seem to be missing is the momentum part and the general lack of resistance to that momentum.

Naysayers have focused on the volatility of exchange-traded funds that are providing exposure to the market. But with that volatility, there is also some pretty respectable performance, which is most impressive when you consider that marijuana is still not legal on the federal level.

The leader in the space is the $1.2 billion ETFMG Alternative Harvest ETF (MJ), which is up 26.5% this year.

Of course, that follows a 21.8% decline last year, which followed a 39.2% gain in 2017, and a 14.6% gain in 2016. You get the picture.

“When it comes to cannabis investing, you must first and foremost be willing to withstand some wild price swings,” said Amy Hubble, founder of Radix Financial.

“There is a lot of retail money out there being indiscriminately thrown at anything remotely related to cannabis, and very little attention paid to fundamentals or strength of the underlying company,” Ms. Hubble said. “This just means there are more traders in the market than investors and that the price may not necessarily reflect value.”

Excellent points. As with any fledgling industry, volatility is a reality. But is that reason enough to avoid the space all together?

Related Topics: Cannabis