Investors in cannabis are already aware of the risky nature of their investment. In the U.S., cannabis is still federally illegal and in Canada, it's been legalized but the rules and regulations are still being decided upon. The general expectation was that recreational marijuana would be available in Canada in early 2018. However comments by parliamentary secretary Bill Blair suggested there was no sense of urgency to establish legal marijuana.
Legislation was expected to be introduced this spring and many companies have been preparing for business to begin in early 2018. The thought that the legislation wouldn't come by even the summer, thus pushing back market expectations sent most marijuana stocks tumbling. The MJIC Canadian marijuana Index dropped 8% last Tuesday and then another 3% on Wednesday as it slipped from 316 to 283.
These kinds of unexpected twists are par for the course in the cannabis stock market, but investors can actually use these moves for their benefit. Jason Spatafora, the owner of MarijuanaStocks.com said, “Irrational exuberance works both ways with marijuana stocks, but as Warren Buffett says, 'When there's blood in the streets – buy.'” Spatafora is also known by his twitter handle, @WolfofWeedSt.
#5. Knowing when to buy is easy, knowing when to sell is hard.
Spatafora says that even if you feel confident in a company and believe in your investment, there are times that the market sentiment is just not in your favor. “Why leave money on the table when you can buy back at a lower price and likely catch a market correction,” he said. This strategy requires a lot of market focus and attention. You may have to set a price at which you are willing to let go of a stock, but then keep your eyes on when you want to jump back in. Luckily many of today's trading websites provide the ability to get stock price alerts.
#4. Invest in companies that are diversified.
A company like Invictus MD (CSE: IMH, OTC: IVITF) that holds a wide array of assets is better suited to grow over time, but less likely to feel the jolt of these quick news downturns. They hold everything from LPs, BioPharma and many other assets in growth markets. You will most likely be seeing more diversification plays in the cannabis market, but right now these are solid plays that still give you tons of upside.
#3. Invest in mainstream biotech companies that are developing traditional drugs using a cannabis compound.
While all of the biotech companies use cannabis as a base compound, they have generally been able to steer clear of law enforcement and mostly recover when the sector gets punched.
#2. Don't panic.
These types of moves are common in this sector because of the risk associated with the market and the speculative nature of these stocks. “Canada is facing a supply and demand issue in medical marijuana alone,” said Spatafora. “I view this as good news since Health Canada is slow as it is with approving licenses, which will mean LP's (licensed providers) will outperform many other stocks.” He suggests investors be willing to jump in and buy on the days that others are jumping ship.
#1. Take profits when you have them.
Investors need to be nimble and be able to have the money ready when another opportunity arises. Spatafora suggests looking at the private placement market. Many of these companies because of the nature of their business rely on private placement capital in their early stages. Investors can seek out these private placement announcements and learn which companies are consistently involved in these deals. Some companies like Denver's GrowCo said it completed a $5 million capital raise, but was beginning a new $2 million raise. This is the type of announcement that a new investor can use to get introduced to private placement investing.
While the industry has faced many negative headwinds, the overall consensus is that legalization will eventually happen. It may take longer than some people want, but the expectation of many is that the public is mostly in favor of legalized marijuana. As such, the various governments are willing to give the people what they want, however they are trying to enact the appropriate guidelines around the product. Insiders are calling this the dot.com 2.0 era, meaning there will be winners like Google, but also bombs like Dr.Koop.com. Proceed with caution and happy investing.
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