Investing Basics and How To's
How To Invest In (Legal) Marijuana
Legalization of marijuana is making great strides not just in the United States, but also on the international stage. The Mexican Supreme Court recently took a step toward legalization with a November 4 decision allowing the plaintiffs in the case to legally grow and use marijuana for recreational purposes. Mexico is just one of the many Latin American and Caribbean nations making the move to legalize. Uruguay is already there and has recently chosen two companies, backed by serious investors, to produce the marijuana that will be sold in the nation's pharmacies.
Investment opportunities follow marijuana legalization, from state to state and from nation to nation. Now, the return on investment (ROI) isn't on par with illegal black market marijuana, but legal marijuana investment does carry some distinct advantages, despite the somewhat lower ROI. These include a greatly reduced risk of prison, robbery, violence and death. Hands down, legal is the way to go when it comes to marijuana investments. Like the tortoise said, slow and steady wins the race.
However, one thing legal marijuana investing does have in common with the old-school black market investing is that, right now, this is still a high risk investment. Logic indicates that over time, as this new industry flourishes and matures, as regulatory, production and distribution systems develop and legal policies align, that risk will decrease. Many industry watchers are comparing the circumstances surrounding current marijuana investment opportunities to those Joseph Kennedy encountered – and profited greatly from – when alcohol prohibition was repealed in the U.S.
Strategic Investments, Positioning For Success
Joseph Kennedy, businessman, politician and father of President John F. Kennedy, U.S. Attorney General Robert F. Kennedy and Senator Ted Kennedy, was a sharp trend watcher and investor. Kennedy positioned himself perfectly to take advantage of the major investment opportunities that became available once alcohol was again legal for recreational use. Prior to the repeal of Prohibition, he dabbled in the then-legal medical alcohol market. People with prescriptions from a doctor, dentist or veterinarian could legally buy alcohol from their pharmacist.
Trend watcher that he was, Kennedy made some excellent business connections during his medicinal alcohol permit days. During the transition from illegal to legal, Kennedy engaged in a calculated alcohol investment strategy. Before the formal repeal of Prohibition, he bought stock and made distribution deals, traveling to England with President Franklin Delano Roosevelt's son James to secure a major import and distribution deal. When alcohol became legal again, Kennedy's profit production structure was already in place. His strategic investment plan produced millions of dollars.
Yesterday's Lessons Do Apply
It's been said that history may not repeat, but it often rhymes. There's a lot to learn from Kennedy's approach to investing in post-prohibition alcohol, lessons that can be applied to post-prohibition marijuana. In addition to the more obvious investment opportunities that lie in publicly traded companies serving the cannabis-based pharmaceuticals industry, such as the NASDAQ-listed British biotech company GW Pharmaceuticals, there are investment opportunities to be had in marijuana production, processing, distribution, financial services and more.
Step back, look at the big picture, including cultural and legal trends, and formulate an investment strategy to place you in the post-prohibition profit zone, hopefully ahead of the soon to be crush of competitors and pushing hard to catch up latecomers. Learn about the processes involved in production and distribution, so you can recognize peripheral investment opportunities. Some of these opportunities can include companies that manufacture indoor growing equipment, such as grow-lights and hydroponic growing systems, and companies specializing in extracting THC and assorted cannabinoids for pharmaceutical use.
Adjust For Risk
While there are many similarities between the shifts of alcohol and marijuana from illegal to legal, there are also some differences to be aware of, differences that may seriously impact investment risk for the immediate future. One of the primary reasons that investing in legal marijuana should be considered high risk is that, despite being legalized to one degree or another in 23 states, with ballots coming up in 2016 for additional states, marijuana is still illegal at the federal level.
Although the federal government is not currently actively enforcing those laws in states that have legalized, California fought quite a battle for years against state-legal dispensaries and grow-ops being busted and assets – liquid cash, in particular — confiscated by the feds. There is always a risk of asset loss for people investing directly in growing operations and retail sellers in the United States until federal law falls in line with state laws.
So, in devising an investment strategy, the short-term transitional period focus may best be weighted toward peripheral and foreign investments. Diversification helps to mitigate overall risk, as losses in one area may be covered by gains in another. However, the ambitious investor with an eye on the long-term, post-transition potentials of investing in marijuana may do as Kennedy did, use this period to make valuable industry contacts for when prohibition is federally lifted.
At that point or just prior to to federal legalization, according to individual risk tolerance, an ambitious investor can start making more directly marijuana related investment moves. Some industry watchers point to cigarette companies, suggesting that marijuana investors would be well served by being poised to invest in their stock at the right moment. That is because major cigarette companies have distribution channels already in place, are accustomed to operating in a highly regulated industry and, once marijuana is fully legal, one or more are likely to step into the marijuana trade.
Other Opportunities To Consider
The American legal marijuana industry is starving for financial services. Drug laws have made it difficult for marijuana businesses obtain standard financial services, including basic banking and business lending services. Right now, the industry struggles to bank about $3 billion in state-legal pot sales revenue annually. Native American tribes are using their casino related financial experience to step in to help fill that gap. One recent partnership, CannaNative and MPS International (MPSI), is an example of that. MPS provides armored car service to move marijuana money to tribal banking facilities.
When it comes to business lending, there are a number of marijuana investment funds, such as Mentor Capital, Inc., that offer business loans to marijuana related businesses. There are also plenty of investment opportunities for peer-to-peer lenders, both equity-based and straight forward loans, in which the ROI lies in the interest rate charged for the loan. However, as with every investment move you make in this industry, due diligence is essential.
Penny stocks are high risk investments, but that is where many marijuana, cannabis and hemp companies stock trades take place. MPS International stocks trade on the high risk over the counter (OTC) markets, as do many fledgling marijuana related businesses. Mentor Capital, Inc. is trading on a higher OTC market tier. This is a highly volatile market, one that should always be approached with care and caution.
Not all of the businesses found on the OTC markets are going to make it through until prohibition is lifted on the federal level. Because legal marijuana is a new industry, many of these businesses are start-ups, many are immature and under-capitalized as well, increasing their likelihood of failure. However, there are some strong players to watch. And, watching is the key. Before investing, find out as much as you can about the company you're considering investing in. See what you can find out about its top people. Study its performance history, then watch its performance in the market for a while before you invest.
ROI is nice, especially when you can see it in the short-term. However, if history does provide accurate guidance, that's not where – or, perhaps the better word is when – the real money is. The United States is approaching the halfway mark. Once a few more states legalize, over half of the states in the nation will have defied the federal government and made marijuana legal. It seems fairly safe to say that the federal government will legalize marijuana in the not too distant future. With federal legalization comes industry stability and decreased investment risk, and that is where real profits and serious money will be made.
An Historic Opportunity
This period of marijuana investment has all the markers of being an historic opportunity, just as Prohibition and its repeal was for Joseph Kennedy. However, it's essential to recognize that historic doesn't mean easy and it especially doesn't mean low-risk, not in these early stages of the legal marijuana industry. For a strategic thinker with a sharp eye for business, social and legal trends who has significant risk tolerance and is able to absorb a few losses, investing in legal marijuana can yield remarkable gains over time.