How Risky Are Cannabis Investors?

In many places in North America, it's not terribly uncommon to catch a whiff of marijuana hanging in the air around you. Much like its public recreational use, discussions of investing in cannabis stocks have also moved from risqué back rooms to front and center with retail investors and financial media.

But for all the talk about investing in marijuana-related industries, just how much are retail investors willing to risk in the sector? There have been some anecdotal rumblings that even crypto day traders have moved into cannabis penny stocks as their new playground. Our findings, however, are very different.

Trends in Cannabis Investment

In the fall of 2018, we analyzed our readership across investing and trading in cannabis and discovered that the most voracious consumers of cannabis stock articles were actually experienced traders who closely followed our technical analysis coverage of pot stocks. They were following price movement and trading patterns, looking for opportunities to trade in and out of these stocks to make fast money.

In 2019, Investopedia explored the rise of cannabis stocks with the average investor. We know our cannabis-related content is extremely popular with our millions of monthly readers, but are they actually buying these stocks, or merely window shopping? We polled our daily newsletter readers (there are about 1.5 million of them) for a couple of days and asked them the following questions:

• What’s your $ level of investments in cannabis stocks or securities?
• What percentage of your overall portfolio have you invested in cannabis stocks or securities?
• How have those stocks or securities performed since you bought them?

While this is not a nationwide survey of all investors and is limited to our newsletter readers, we were impressed to see that 768 people responded to our survey within 36 hours. You might call them power readers.

Here are the results:

• 60% of respondents are actively invested in the cannabis sector, while 40% are not at all.
• Less than 10% of respondents have committed more than $25,000 to cannabis stocks.

• Nearly 5% of respondents are "all in," having committed 91-100% of their portfolios to the sector.
• 15% of those who invested have committed over half of their portfolios to cannabis stocks.
• 75% of those invested say cannabis stocks represent 20% or less of their portfolios.

• 40% of those invested say that their cannabis investments are higher today than the day they bought them, while 36% say the results are mixed.

What Does This Tell Us?

There is clearly an appetite among our readers for investing in cannabis and many of them have put some serious money to work in the sector. That said, the majority of them are clearly tip-toeing their way in and not taking too much risk with their portfolios. They’re being relatively careful with their exposure to the sector, which is smart given its volatility, uncertainty about the regulatory environment, and lack of proven business models and profitability among the publicly traded companies therein.

Chasing Performance

Investors often exhibit a herd-like mentality when it comes to chasing performance. We’ve seen it over countless cycles across centuries, as investors chased returns in tulip bulbs, railroad companies, gold, oil, dot-com stocks, cryptocurrency, and now cannabis.

When 40% of our respondents stated they’d seen price appreciation in their cannabis portfolios, we took a closer look. We compared the top cannabis ETF and its performance over the past year, which we thought was a reasonable time frame, to the S&P 500.

We chose the ETF MJ (ETFMJ Alternative Harvest), which is the oldest pure-play cannabis ETF available. It holds popular U.S. and Canadian publicly traded companies like Aurora, Tilray, Cronos, and Canopy Growth, among others. Turns out, it’s returned a handsome profit compared to the S&P 500.

Clearly, you could argue cannabis stocks have outperformed the broader market in the past year. The truth is, while the MJ ETF has indeed done that, the publicly traded universe of cannabis stocks includes hundreds of penny stocks, companies that put "cannabis" in their name but have nothing to do with the industry, and companies that have gone from public to bankrupt in a matter of weeks. The sector can be risky and full of pitfalls. For every success, there are dozens of OTC cannabis stocks that have flamed up and then out in a matter of weeks.

While our survey isn’t hard science, we know our readers are interested in the sector and are willing to put their money on it. It’s good to see they’ve approached the cannabis sector with the caution it deserves. There have been great gains, to be sure, but the future of cannabis investing is still hazy.