Should you be getting into marijuana stocks?
There’s a big market here, but one big swing factor.
There are two new big-dogs in the world today and I’m talking about emerging (hype-driven) opportunities.
One of them is Bitcoin, I’m researching everything to do with that market and will be reporting back my finding within the next two weeks.
The other is marijuana. Let’s begin…
In Japan, the Emperor wears hemp.
He has done for centuries. The hemp plant – of which ‘marijuana’ (the plant you smoke to get you ‘high’) is just one strain – has had a long and fruitful connection with humanity.
Hemp oil was being used by the ancient Egyptians as a medicine.
NASA was using marijuana to help astronauts unwind from a tough day on the space station.
(No, I just made that last bit up.)
But then marijuana (and with it hemp) went out of favour. It became a prohibited substance. The hemp industry got shut down.
(Many people say it was Dupont and the cotton industry that got hemp shut down – mounting a massive scare campaign about the dangers of marijuana.)
Whatever the case, it’s been illegal for about a century.
But now, it seems, the tide has turned. In America, there are now more states where marijuana is legalised to some degree or another than there are where it isn’t.
It’s a radical social experiment, but one that is creating a billion dollar industry in the process.
And for people in the right place at the right time, a small fortune.
This chart here has some of the big success stories. If you put just $100 into some of these companies just three years ago, you could be banking some incredible returns.
One company turned $100 into $35,500 for you! Nice!
Of course, not everyone’s a winner. The alcohol industry for example. They’re not stoked about it. Alcohol and marijuana seem to be in competition with each other.
In states where marijuana is legal, pot sales are growing exponentially, while booze sales are flat or falling.
Take this chart from Washington state.
Quarterly marijuana sales have boomed from $23.6m just a few years ago to over $300m today.
Some people are saying that the marijuana industry is going to be bigger than the manufacturing industry in the US by 2020. It’s pretty huge.
And the stereotype is that marijuana is for teenage boys with their X-box and Dominos pizza.
But if you break it down and look at who is actually using legal weed shops in the US, it’s a surprisingly broad cross section of the community.
It’s only very slightly tilted towards males, and it’s tilted towards younger cohorts (25-34) but not massively.
To me, that looks like an industry that’s got legs.
Ultimately the American experiment is a case study in how governments can make or break a market.
Sometimes government regulation is a good thing. I personally prefer to live in a world where there isn’t an open market for personal nuclear weapons. I support government regulation in that industry.
However, and I know this will come as a surprise to many of my readers, the government isn’t always perfect.
It doesn’t always make great decisions. Often, it actually makes very bad decisions in order to protect the interests of the rich and powerful.
(I know! It was a shock to me too. I’m sorry. I really should have made sure you were sitting down first.)
So is all hell going to break loose if we legalise marijuana? It seems unlikely. Marijuana has been down the priority list for the police for a while. It has never been particularly expensive or difficult to get.
And we’ve got by.
And some argue that there’s a signalling effect here. That if we legalise marijuana we’re telling kids that it’s ok to get off your face.
That’s kind of the message we started sending when we legalised alcohol again if you’re using that logic. And if you’re taking moral guidance from the government you probably need to have a good long chat with your priest.
So personally, I see this having a very small impact on the fabric of society.
So if you’re ok with the moral dimensions, and I more or less am, then the question is, where is the money?
This is a tricky one. We’re really looking for the government to make a market here. There are a number of Australian companies getting ready to launch when Australia finally starts down the path towards legalisation.
But the government is sending mixed messages here. Some days it looks like their stance is softening. Other days, it looks like it could be years down the track.
As I’m sure you know, it’s cash-flow that kills most start-ups. For marijuana stocks in Australia that could mean a whole lot of stranded companies with state of the art infrastructure and nowhere to deploy it.
And the longer the Australian government drags it out, the more opportunity there is for foreign companies to fully gear up and get ready to expand.
I mean, let’s say Australia doesn’t open the door until well after 2020. By that stage, the American marijuana industry will be starting to consolidate. Large players will start to emerge. They’ll have developed all the tools they need – technology, business models, finance partners.
They’ll come into the market full guns blazing, just as our little Aussie battlers are trying to get off the ground.
They’ll probably get slaughtered.
And right now, it seems that the government is going the wrong way for people interested in backing Aussie companies. I know a hemp farmer up in Northern NSW. They’d been gearing up production of low-THC (the stuff that gets you high), high-CBD (the stuff that has medicinal properties) crops.
The government had been moving towards making CBDs legal.
But then the Therapeutic Goods Association surprised everyone and said, actually, no, CBDs will remain illegal. You have until October to wrap things up.
It looks like they’re stuffed.
So this is the danger here. If you’re investing strategy relies on the stroke of some bureaucrat’s pen, your strategy is built on an institution that has been corrupted time and time again.
So there’s a substantial amount of risk there.
And that’s one of the reasons why the returns are so high. Can you predict what the government’s going to do in two or three years? Sometimes it’s a coin toss.
So look, yes, there are potentially some huge returns to be made out of the marijuana industry. I’m looking at some options myself.
But be aware of the risks. The government was happy to hang a whole bunch of hemp growers out to dry. They’re not going to give a toss about your investments.
That’s not to say it’s not worth it. But marijuana stocks belong in the risky tail of your portfolio, I reckon.
Have you made money from the marijuana hype? Are you sold on it, or are you staying well clear?
Do you think it’s a bubble about to burst, similar to techwreck2000?