Cannabis stocks have been a hot topic for the last few years, and it continues to be so. Investing in cannabis has made some people a fortune, while others just got losses and disappointment in return.
The cannabis industry is very young, and there’s no clarity on the long-awaited marijuana reform, which makes investing in cannabis stocks a risky business for sure.
Most cannabis companies are not yet profitable. And some of the major players in the US can’t even list on major stock exchanges like Nasdaq. This is why selecting the right stock to invest in requires a lot of speculative work. This speculation factor causes a lot of people to lose money.
In the first part of the cannabis investing blog, we discussed the best cannabis stocks to invest in. In this part, we’ll discuss the three mistakes that people make while investing in cannabis stocks.
To help us with this blog, we have Dan Ahrens, portfolio manager of the AdvisorShares Pure Cannabis ETF (NYSE: YOLO) and AdvisorShares Pure US Cannabis ETF (NYSE: MSOS). He is also the author of Investing In Cannabis: The Next Great Investment Opportunity.
Today, Dan will point us to the three biggest mistakes investors make while investing in cannabis. And how to avoid making these mistakes to protect your hard-earned money.
Mistakes While Investing in Cannabis Stocks
The cannabis industry is so risky and volatile that it’s easy to make mistakes, even for experienced investors. It is certainly not possible to list all the mistakes that you can make because there are so many.
But in this blog, we’ll discuss the three most common and the biggest mistakes that most people make as cannabis investors.
1. Don’t Invest Blindly in Cannabis Stocks
Cannabis is a market that a lot of people are not insightful about. Still, they are just jumping in it blindly and losing money. You don’t want to be one of them.
There is a very wide difference between the performance of the best and the worst performing cannabis ETF. A difference of 60% between the two shows that not the whole industry is performing well, and you can’t just jump into it blindly.
It is of extreme importance that you first of all select individual stocks and select them very carefully. Most of the cannabis stocks are trading just on the basis of hype and only hype.
You have to individually look under the hood of these companies. Analyze them and see if their balance sheet really justifies the stock price or not.
2. Understand the Difference Between US and Canadian Operators
Cannabis is still not legal in half of the US. Neither are cannabis operators allowed to list on the US stock exchanges. However, in Canada, the use of cannabis for medical and recreational purposes is legal.
That is the reason why most of the cannabis companies listed on the Nasdaq and NYSE are Canadian. Before investing in cannabis, you need to understand the difference between the US and Canadian companies.
Canadian companies are generally called Canadian LPs (Licensed Producers), while US companies are called Multi-State Operators (MSOs). Candian LPs can’t sell marijuana in the United States, while US Multi-State Operators can.
People who are insightful of this stuff know that even after the legalization of marijuana in the US, Canadian LPs are not gonna cross the border, come to the United States and be successful here. Which means the real opportunity exists on this side of the border, not that.
Now, you might think that even if Canadian LPs can’t come to the US, they can still go and sell to other countries and grow there.
Great question, but then you have to look at the statistics. The market for cannabis in North America is by far the biggest in the world.
To give you an idea of how big the North American market is, the sales of marijuana in the state of Colorado are higher than in the entire country of Canada. California sales are even higher than that.
The entire continent of Europe is not that big compared to the US. Also, cannabis is not gonna be legalized for recreational purposes in Europe anyway except for a few tiny countries.
In short, the US market is 10 times the size of Canada, and the Canadian market is many times the size of the rest of the world.
3. Avoid the Hype You Hear in the Media About Cannabis Stocks
The third common mistake that a lot of people, especially rookie investors, make is investing on the basis of the media hype.
The media can hype anything without any particular reason. There was hype in 2018 when they said that Canada is going to legalize cannabis for recreational adult use and all the cannabis stocks skyrocketed.
Soon after Canada did legalize it for recreational adult use, all the hype was over, and the stocks that were trading on hype came crashing down.
Then in 2020, when a severe sell-off came in all of the cannabis stocks, we saw a real separation between good stocks and hyped stocks. But still, you turn on the mainstream media, and you’ll see the same usual suspects – Canopy, Aurora, Tilray, and all these big Canadian names because they are what is listed on NYSE and Nasdaq.
While the other major stocks, including the multi-billion dollar companies that operate in the US, are very much under the radar.
Since they’re not listed on the major stock exchanges, they trade a fraction of the shares. While the big Canadian names still trade a lot more volume. Which is why it’s easy to be sucked into the hype, which constantly builds around the cannabis reform that nobody knows if and when will come.
How to Avoid Making These Mistakes
Ok, so just knowing the three common mistakes that people make while investing in cannabis is of no use if you don’t know how to avoid these mistakes.
In this part of the blog, let’s discuss some of the ways how you can avoid making the aforementioned mistakes.
1. Active Management
Active management of your portfolio is crucial while investing in an industry like cannabis. You obviously wouldn’t want to invest randomly in cannabis stocks. There are names to be avoided at all costs, and then there are names that are greatly underrated.
One of the major reasons why Dan’s cannabis ETFs YOLO and MSOS have performed well in the past is because of the active management of the ETF and its constituents.
Active management doesn’t only mean selecting the right stocks but proper fund allocation and risk management.
2. Investing in MSOs (Multi-State Operators)
As you know, Cannabis companies operating in the US are called Multi-State Operators (MSOs). The American market is much bigger than the Canadian market and the rest of the world.
If you’re investing in cannabis stocks, don’t just limit your portfolio to some common Canadian names listed on the major exchanges. An even bigger opportunity exists for MSOs like Curaleaf, Green Thumb, Cresco Labs, and Trulieve. Which are also Dan’s top four recommended companies.
At AdvisorShares Pure US Cannabis ETF (NYSE: MSOS), they have access to stocks that other competitors don’t. It required them a great deal of work with custody banks, NYSE, and legal firms but it was all worth it in Dan’s opinion.