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Here’s How to Reduce Your Risk When Investing in Pot Stocks

We look at marijuana investing and share 4 tips for covering your downside while riding the weed wave.

Photo by Sharon McCutcheon on Unsplash

With legalization of recreational marijuana in Canada imminent, the market for weed stocks has had a boon. And for a good reason. There is potentially 5 billion of annual sales to be added to the industry as a result.

Expectedly, accompanying volatility abounds. Tilray, for example, ran up 200 per cent per share in under a week, only to give back those gains in the same amount of time. We want to help guide investors in the space through these choppy waters. Here are 4 simple marijuana investing tips.

1. Keep it small

Just like other high-risk holdings such as resource or mining stocks, marijuana stocks should represent only a fraction of one’s overall portfolio. Just like boarding a plane for Las Vegas, decide an amount you’d be willing to leave behind should the house win. In any nascent industry, some companies will soar ahead, and some will fall apart in the process of market consolidation, and it can be very difficult to predict which will do which. Investing responsibly means understanding that marijuana stocks have a higher chance than others to do the latter.

2. Pay attention to both producers and services

Consider companies who don’t rely 100% on marijuana for their business, which will have a greater chance of survival should their weed-related business fall apart. While the major weed stocks such as Canopy (TSX.T: WEED), Aurora (TSX.T: ACB) and Tilray may still have room to grow and to consolidate smaller players, consider ancillary stocks as well. Scotts Miracle-Gro (NYSE: SMG), for example, operates a subsidiary company with marijuana exposure, providing hydroponic solutions, soil, nutrients and lighting to producers. Unlike big players, however, only 11% of the company’s sales come from marijuana. This type of play opens an investor up to put a little into the big marijuana producers, and a little into another weed play with less sector risk. This is also a good choice for those who are nervous to invest in pot to any extent and just want to dip a toe into the sector.

3. Diversification is the name of the Game

Investing in pot stocks is no different than any other sector, where diversification is the name of the game. Again, as this industry consolidates there will be stronger and weaker stocks, and no one has a crystal ball. Having your money spread across a few good companies will help you sleep at night if one takes a hit.

4. Ride the wave with lower cost ETF’s

With the previous point in mind, exchange-traded funds, or ETF’s for short, may be the way to go to allow maximum diversification at minimum cost. Horizons Marijuana Life Sciences ETF, for example, tracks nearly fifty cannabis stocks and keeps its cost low at 0.75% Management Expense Ratio (MER).
However you decide to invest in the marijuana market, keep a cool head and invest as you always should, by choosing companies in which you believe. OrganiGram Holdings comes to mind as a solid holding, a company with efficient use of space and significant production potential that will help the company last, long-term.

Written by Jason Bagg

Mr Bagg has over 20 years experience in financial services ranging from Capital Markets to Private Equity. Mr Bagg has helped clients build wealth, reduce taxes and plan for retirement. Drawing on his experience, Mr Bagg has spoken on different panels regarding investing and has written numerous due diligence reports and white papers in this area.

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