Investing in Cannabis: Benefits and Drawbacks

Regardless of the labels that surround cannabis, one thing is for certain: the drug has gone from being associated with unappealing stereotypes to catching the interest of the suits on Wall Street.

Marijuana was arguably the crux of our nation’s War on Drugs but has been gaining acceptance of late - not just in terms of public opinion, but in terms of the law. According to Vox, marijuana is now legal for medical use in 30 states, has been decriminalized in 13 states, and is legal for recreational use in nine states and Washington D.C.

That’s why so many investors are paying attention. According to Statista, sales of medical marijuana are expected to tally $4.75 billion this year, while recreational marijuana sales are slated for $6 billion. Both of those numbers are expected to reach $24 billion by 2025. That comes out to a growth in sales of about 300% and 400% in less than a decade.

Still, investing in the growing cannabis industry is accompanied by a good deal of question marks and risks. With that in mind, let’s take a look at the pros and cons of investing in marijuana before considering the “how” for investors willing to inhale the risk.

Pros and Cons of Marijuana Investments

On the plus side, marijuana stocks are considered by many a "vice stock" and vice stocks are largely thought to be recession-proof. Other vice picks include alcohol, tobacco and gambling stocks, which have historically outperformed during economic downturns. Even when times are hard, consumers are willing to pay up for these oft-criticized habits.

Yet unlike alcohol, for instance, marijuana brings other benefits to the table. It’s also a healthcare play: the drug can be used for chronic pain, anxiety, even in the fight against cancer. On top of that, it’s increasingly seen as an opioid alternative - something that’s especially relevant with over 115 people dying from opioid overdose each day in the United States.

But the pros are only half the story. Investing in marijuana comes with some cons that cannot be overlooked. The drug is still illegal at the federal level, though a bill to legalize medical marijuana for veterans is currently working its way through Congress. The federal government classifies marijuana as a Schedule 1 drug, which by definition declares there is high potential for abuse, no currently accepted medical use, and a lack of accepted safety standards.

Meanwhile, the fact that legalization is taking place at the state level means a good deal of variation - something that can hurt expansion efforts for companies in the space. And because the industry itself is new, many of the companies focused on it are new as well, meaning they don’t have the sound financial fundamentals of more established organizations.

Despite progress, stigma around the drug still exists. A study of medical marijuana patients in California found that the stigma around marijuana has “a profound effect” on if and how patients pursue treatment.

How to Invest in Cannabis

Now that we’ve laid out the landscape, let’s focus on the “how” for marijuana investments. As evidenced by these pros and cons, there’s a lot of risk in the marijuana world and there’s often even more to consider when investing in a specific company in the space. But outsized risk is also a prerequisite for outsized gains much of the time, so many investors may be willing to use marijuana to add some alpha to their portfolio.

One way to invest in marijuana, of course, is through stocks. Because of the variance and question marks around American regulation, many investors have been more focused on Canadian companies in the marijuana industry that trade on U.S. exchanges.

With Canada’s president Justin Trudeau working to fully legalize recreational marijuana, investors have driven shares of the biggest marijuana stocks higher. Still, the Securities and Exchange Commission (SEC) itself has issued a warning about marijuana-related stocks in the wake of that news. “If you are thinking about investing in a marijuana-related company, you should beware of the risks of investment fraud and market manipulation,” the SEC wrote. “Fraudsters may try to use media coverage about the legalization of marijuana to promote an investment scam.” Just like with any industry, a good deal of due diligence should be done before adding a specific company to your holdings.

Another investment approach is to focus on companies that have exposure to the marijuana industry, but aren’t all-in. There are now several U.S.- based companies investing in cannabis affiliates ranging from gardening supplies to beverages.

For even more diversity in your marijuana investment, an exchange-traded fund (ETF) may be the way to go. Once again, marijuana funds can often be found in vice ETFs.

Don't Invest Blindly

It’s easy to understand why investing in marijuana is an appealing idea. An industry in its early stages has a lot of upside potential. However, many companies will come and go as the industry matures, while the amount of speculation happening in the space makes it difficult to tell where true value lies.

Still, stocks and ETFs are available for investors who want to take on the risk in the hopes of turning a profit. Keep in mind that at this point it is still a speculative investment. You should only allocate a small portion of your portfolio that you could sacrifice without it affecting your overall financial plan.