Okay. So you’ve noticed that cannabis is becoming a big business in the US and abroad. But you don’t have the capital or the expertise to open your own business in this booming new industry. And making a direct investment in someone else’s company is not the way you want to go either. What to do? Consider investing in the shares of one of the growing number of cannabis-related publicly-traded companies.
But first, a warning. As a potential investor in this industry, don’t let yourself be misguided by the fear that you’re going to miss out on the biggest winners if you don’t buy as many shares of these companies as you can afford as soon as possible. In my 20 some-odd years as an analyst on Wall Street, I saw many hot industries come and go. Biotech (early 1990s), riverboat casinos (mid-1990s), early Internet (late 1990s/early 2000s), and many others caught Wall Street’s fancy and saw their share prices rise to nosebleed levels. Yes, investors who bought early and sold early made a good deal of money, but the reality is that very few investors—professional or individual—can actually do that with any consistency.
It is also worth keeping in mind that these types of hot industries are hot because investors rightly believe these companies will benefit from satisfying untapped markets, providing innovative new products and services not just this year or next year but for many years to come. In the three examples I quoted above – biotech, riverboat casino,s and the Internet—time has confirmed that the industries themselves have had staying power. But many of the individual companies that investors were most excited about at the time were not the companies that proved to be the best bets for long-term success.
That is not to say there is a “perfect” time to invest in such an industry. What I would recommend to you is that you think about how much money you want to invest in this industry (please, don’t say to yourself, “All of it.”). Then have the patience and discipline to take, say, one-fifth to one-tenth of that amount and invest it in at least two, preferably more, of these companies every two to three months.
Yes, using this approach might mean you will miss out on some quick profits in the short- term. But in such a young industry there are many, many companies waiting in the wings to bring their shares to market. The likelihood is very remote that the earliest companies to go public in an industry will be the biggest winners in the short or the long run. No one knows which companies will succeed in such a robust, young industry. So please, don’t bet you can be the one investor who guesses right.
Over the next couple of weeks I will look through the current crop of publicly-traded cannabis companies and give you my thoughts on the risks and potential rewards of investing in at least a few of them. As an investor you cannot know the future, but it is sometimes possible to separate the wheat from the chaff.