How to Invest in the Cannabis Industry
Examine all available options in this emerging market and go beyond simply buying cannabis stocks.
The cannabis industry is booming.
Many investors are rushing to purchase cannabis stocks. But there are several ways to invest in cannabis without actually buying stock. Savvy investors will take the time to perform some careful due diligence and really understand the options out there.
Because savvy investors know that this boom is being called the Green Rush for a reason. Savvy investors know that we’ve been here before.
We’ve seen that decisions made in haste can waste time and significant opportunity.
Analysts call what’s happening in the cannabis sector the Green Rush to draw a connection back to the Gold Rush of the mid-1800s.
Don’t worry – no long history lesson here. Most people already know that swells of fortune-seekers headed west in search of gold.
But what most people don’t know is that fortunes were not fueled by the images we’ve all seen of the panhandlers in the streams. Instead, the largest fortunes were made by people who never went after the gold at all. It was the stores, the hotels, the clothing manufacturers, etc.
The same is now true of the cannabis industry. Medical cannabis/marijuana stocks are getting a lot of attention. But so many other arms of the sector are bursting with even more potential.
In this article, we’ll examine how to approach cannabis investing. Plus, we’ll look at stocks and other ways to invest in this emerging industry. We’ll also walk through key considerations you should be employing when making these investment decisions.
Investing in the Cannabis Industry: An Overview
Every investor is different. So there is no one right way to invest in the cannabis industry.
However, diversification is always a good place to start.
Once you have decided to direct a portion of your portfolio into cannabis, the next step is figuring out how to diversify within the sector.
For investors looking for stocks, we like a combination of well-known penny stocks with a heavyweight towards private (non-public) cannabis/marijuana stock offerings.
Go back to the Gold Rush for just a moment. The growers and the dispensaries are going to be like the gold in the streams.
The savvy investor will seek out the peripheral opportunities in non-flower-touching cannabis companies:
- Companies that develop technology
- Packaging companies
- Adjacent real estate opportunities
- Lighting systems
- Management services
- Biotech companies that extract cannabinoids
- Developers of cannabis-related pharmaceutical drugs
These opportunities don’t only present themselves in the form of stocks. There will also be private placements to consider.
No matter which approach you choose, due diligence is crucial in any emerging market. Cannabis is no exception.
Your due diligence should include:
- Understanding medical cannabis vs. recreational cannabis
- Learning about the unique risk factors in the marijuana industry
- Researching the people managing the investments
- Looking closely at the specific vertical that the start-up company is pursuing
- Spending time understanding the financial statements
Let’s look at each due diligence component a little closer.
Understanding Medical vs. Recreational Cannabis
In the U.S., medical cannabis is legal in 35 states, plus the District of Columbia. Plus, it’s legal in more than 30 countries.
Medical cannabis is being studied carefully. While there is no proof medical cannabis/marijuana cures any specific condition, studies show that it certainly helps.
Cannabinoids found in cannabis provide relief from pain and other symptoms related to:
- Multiple-sclerosis (MS)
- Anorexia nervosa and bulimia
- Epilepsy and other seizure-related illnesses
- Tourette’s syndrome
- Crohn’s disease
- Insomnia and other sleep disorders
- Schizophrenia and psychosis
- Traumatic brain injury, memory loss, and cognitive impairment
- Huntington’s Disease
- Parkinson’s Disease
Investors see the potential of investing in medical cannabis because it is a natural alternative to manufactured medicine. These alternatives are attractive because they don’t produce the side effects that many traditional treatments do.
Natural alternatives are becoming popular because people want to avoid the laundry list of adverse side effects linked to traditional treatments. These side effects sometimes include death.
Studies are showing a lot of support for the legalization of recreational cannabis legalization.
People are becoming more and more educated about the many medicinal benefits of cannabis. Plus, the introduction of CBD to the mainstream market has shifted the way people view cannabis/marijuana.
The many positive attributes of cannabis are coming to light. So the negative association that it was just for getting high is starting to ease.
In both the recreational and cannabis investing space, the financial news media, like MSNBC or Mad Money, create a lot of hype. These shows need an exciting story. The volatility of the penny stock market space delivers that.
It’s exciting for them. It’s exciting for their viewers. It makes good TV.
But for us, cannabis penny stocks are more penny stocks than they are cannabis. What I mean is that the underlying asset supposedly is a cannabis business. But what we’ve seen is a lot of pump and dump schemes.
You’ve got to know the risks that are out there.
Cannabis Industry Risk Factors
Every industry has risks. But the cannabis industry is not only emerging, but it’s pretty controversial. That’s not stopping investors from jumping in. But the wise investor will look before they leap.
Below are five of the most significant risks facing the industry:
- Supply risk: Like other emerging industries in the agriculture sector, cannabis can see ups and downs when it comes to supply.
- Legal risk: Of course, selling cannabis/marijuana in the U.S. in 2021 is illegal at the federal level. There are federal restrictions that regulate how banks can deal with marijuana-related businesses. This severely limits access to financing for many U.S. cannabis businesses. Be sure to check that the company is operated with the proper state and local licenses.
- Political risk: Political support to make cannabis legal at the federal level is growing. But there are no guarantees. The National Institute of Health says it best. “…the states formulate medical cannabis statutes based not on scientific evidence but political ideology and gamesmanship.”
- Financial risk: Again, cannabis companies are young. This is an emerging market. As a result, many cannabis companies don’t show a profit for several years. New companies that struggle with cash flow often seek that cash by issuing new shares. Doing so dilutes the true value of existing shares.
- OTC/Pricing risks: OTC stands for over-the-counter. Cannabis companies tend to trade this way. The New York stock exchange and the other U.S.-based exchanges don’t allow cannabis stock trading where federally illegal activity. So these companies are not regulated like other stocks.
Lack of regulation leads to questionable fundamentals.
Why? Because they are not required to file financial statements on a regular basis.
Plus, they are not required to maintain strong levels of liquidity. As a result, investors have a hard time evaluating risk.
There’s been this strange situation where U.S. companies have done reverse mergers or gone public on the Canadian stock market. And then you’ve got Canadian companies that would be illegal in Canada going public on the New York stock exchange.
Some of these quirks have created stock bubbles and wild fluctuations in share price.
Before making any cannabis stock investments, I would first remind myself that this is a speculative marketplace.
Remember that valuations do fluctuate wildly. So before investing in cannabis penny stocks, consider only investing the part of your portfolio that you can afford to lose.
Research Company’s Management
If the management team isn’t solid, it doesn’t matter how good the cannabis is. It doesn’t matter how unique the business model appears.
People make all the difference. The right people make good decisions. It’s that simple.
So how can you find out about the management team of a company?
There is no one right way to do it. But you can begin by researching the founder or the CEO.
Ask a few questions:
- What is the track record of the founders or the CEO?
- Do they have industry experience?
- Why did they create this company?
- What are their values? Do those values align with yours?
- Is there a mission statement that feels trustworthy?
- Are they building a team of yes-people or an actual brain trust?
- Do their financials align with their media cycle?
That last bullet is really important.
Some of the more prominent names out there will own actual greenhouses. They will have a retail footprint. But when you go down one tier and dig a little deeper at cannabis stocks there, you’ll begin to notice a gap.
They don’t have assets. But press releases pump up their image. The media cycle drives the stock price.
We’re dealing with penny stock investing here. If you like to take risks on something that might hit it big, the cannabis sector itself has potential.
But dealing with the cannabis penny stocks is probably closer to cryptocurrency investing than blue-chip stock investing.
Look Closely at the Industry Vertical and the Financials
Depending on the vertical you’re considering, you’ll have different questions when reviewing financial statements:
- Growers: Do they own enough cultivation space?
- Retailers: Do they have the right kind of retail space secured?
- Suppliers: Do they have well-designed contracts? Do they have customers in the pipeline?
Even if all the answers look good on paper, you don’t necessarily have a winner. There are so many factors that go into seeking out a company that will dominate in this competitive market.
Investing in Cannabis Outside the Stock Market
The entire stock market is speculative.
The word speculative, by definition, means risky.
Stocks are speculative because they’re often based on predictions rather than solid knowledge. Pricing can be manipulated. Share prices in the penny stock range – even without manipulation – can see massive swings.
That’s why it’s so important to know all the available options to you as an investor.
Cannabis stocks are attractive to many investors for several reasons:
- Lots of liquidity
- More markets
- Apps that make it easy to buy stock on a whim
- It doesn’t require a lot of time
Investors wondering, “should I invest in marijuana stocks?” need to slow down. Don’t get swept up in the rush.
There is a lot of upside potential when buying the stock. But the downside can be huge. When you take a massive loss, these benefits will not seem anywhere near worth it.
If you’re doing this on a daily basis, cannabis penny stocks might be right for you. Cannabis penny stock investing is best left to the day traders out there.
But for buy and hold investors, exploring other options is our recommendation.
Getting in on the Ground Floor
Getting in on the ground floor always sounds amazing. But how can an average person who isn’t connected do it?
Start by reading popular publications like:
- Business Insider
- New Cannabis Ventures
- Veridian Tracker
You’ll quickly realize that the best deals are not limited to publicly traded stocks.
The best cannabis investing opportunities are hidden in the private markets. They are not publicly traded.
The best cannabis investing opportunities are hidden in the private markets. They are not publicly traded. These opportunities are typically reserved for hedge funds or investment banks.
But what if you don’t have this kind of VIP access? What if you’re a regular investor?
Investing in companies outside the stock market is a bit more challenging.
As awful as it sounds, it’s all about who you know. Even in this information age, you do still have to know somebody.
This is where the industry is kind of, well…broken.
But here’s the good news…
Private investors have really good options.
Private equity advisors and firms are trying to get the word out that investors have other options.
At Gladbrook, now you know someone.
- You’ve got someone in the industry to open that VIP door for you.
- You’ve got someone to get you inside on the ground floor.
If it’s a good fit, we can help you find options that align with your goals. Plus, we can help you do that outside of the stock market.
Gladbrook is different because we’ve designed a structured investment for private investors that buy directly into our company. You’re not subjected to the fluctuations of a speculative stock market. It’s more like investing in a real estate company.
We actually do have real estate included in our cannabis investments. So when somebody invests in Gladbrook, they’re investing in both a cannabis operating portfolio as well as a cannabis real estate portfolio.
This is contrary to what a lot of investment bankers would like to see.
But here’s the thing. We’re not designed for investment bankers.
- We’re designed for progressive investors that want to take part in a medical cannabis revolution.
- We want investors that care about sustainable investing and socially responsible investing.
- In return, they become an investor, receive investment units, and know they can see a return on their investment.
- Gladbrook investors don’t have to stress and buy and sell like a day trader.
So once you decide that you’re interested in making a cannabis investment, go out and meet people in the space. Find out where there are available offerings. Dig into the investment profile and make sure it aligns with your investing goals.
For example, we created Gladbrook, so we have both a cannabis business and a cannabis real estate business. Our mission is to improve human health and wellbeing by investing in the most innovative products and services in the cannabis and sustainability sectors. With our team of scientists, doctors, and industry experts, we provide private investors with early-stage investment opportunities and advisory services.
In an emerging industry that centers around psychotropics, there is bound to be a risk. But with risk comes reward.
Investors seeking to take advantage of the wild growth within the cannabis industry aren’t limited to traditional marijuana stocks. By investing in private placements, you can diversify your investment throughout the sector and get in on the ground floor of some amazing opportunities.
For further information, book a complimentary consultation with Gladbrook’s Founder, Warren Blesofsky.
Co-Founder & President, Gladbrook
Warren is a scientist, real estate broker, environmentalist, and co-founder of the Sklar Center for Restorative Medicine. After graduating from UC San Diego with a Master's degree in Biochemistry, Warren has had several successes in medical research, alternative medicine, real estate, and distressed asset fund ventures. Warren and co-founder Ryan Elmore's mission is to improve our world's health, well-being, and enjoyment by investing in the future of cannabis and plant medicines.
Book a complimentary Cannabis Investing Consultation with Warren.
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