What You Should Know About Investing in Cannabis

Even Martha Stewart is cashing in.

(Jason Walton @WALToONs)

Saving for retirement doesn't have to be boring—especially now that you can trade honestly in the same commodity you bought from a guy in a van in your high school parking lot.

With cannabis rapidly going legal, experts say it's a rare chance to invest in a brand-new industry that is already known to be lucrative.

"People are viewing it as analogous to the end of alcohol prohibition," says John Torrens, professor of entrepreneurial practice at Syracuse University's Whitman School of Management. "In our lifetimes, we might not see a bigger opportunity than this. We're seeing a whole new industry born right in right of our faces."

Weed is legal under federal law in Canada, which means cannabis companies there can go public and trade on the Canadian Stock Exchange. In the U.S., continued federal prohibition means only companies that play a supporting role—like selling specialized soil amendments or air conditioners to cool grow houses—can be traded on the New York Stock Exchange. For now, you can only invest privately in U.S. companies that actually produce or sell cannabis, with an extra layer of speculative caution.

Companies in the U.S. and abroad are currently vying to be best positioned when weed is finally legal nationwide, a moment some experts forecast could arrive within three years. Because of that, international investors are buying into U.S. companies under the rationale that they have the biggest growth potential worldwide.

Even Martha Stewart is cashing in. CBD products producer Canopy Growth announced last month that the homemaking guru signed on as an adviser. That spurred a boost in earnings throughout the cannabis sector.

Locals are diving in as well. Web developer and former Oregonian music critic David Greenwald says he started investing after Colorado legalized recreational marijuana in 2012. Today, Greenwald says he follows the ups and downs of various cannabis companies with a rigor he normally reserves for basketball fandom.

"We're talking about the end of prohibition," Greenwald says. "Some of these companies will go on to be Anheuser-Busch or Coors."

Torrens says it's strategic to have both more reliable stocks as well as some that are more volatile, and thus potentially more lucrative over the long term. He says cannabis stocks are perfect for that second part.

"It's probably a really good part of a balanced portfolio," Torrens says, "especially if you're young and have a long horizon."

Want a taste of that weed money? Here are a few pointers.

Start in Canada

Both Torrens and Greenwald say top-ranked Canadian companies like CannTrust and OrganiGram are smart investments. Canadian companies are big business because they can export weed all over the world. Right now, that means to Europe, Australia and Latin America. And that market will explode once Canadian companies are allowed to export to the U.S.

"Everybody's excited about the law that passed in Canada," Torrens says. "But there's not much of a national market there. The real market is in California, not Canada. Once federal prohibition lifts in the U.S., you're going to see this valuation go through the roof."

Do Your Research

Greenwald recommends checking out Tradingview.com to become familiar with stock charts.

"Look at the history of daily and weekly charts for these companies," Greenwald says. "Ask, 'Am I buying at right time? Is it going to go down?' Watch prices every day and watch for patterns. But you don't want to try to time the market. The market is always smarter than you are."

Invest in Real Companies

Make sure any company you invest in has actual, real-life facilities and a history of revenue. Otherwise, you could be investing in a scam.

"Use Google Finance to check out some of these companies," Torrens says. "What are their revenues? Their debt? What deals are they striking? What news are they making? And just follow them for a couple months."

Don't Get Caught Up in the Hype and Buy at the Top of a Bubble

Even companies that seem well-positioned can tank unexpectedly. Greenwald says he got caught off-guard in December when Aphria stock dropped 30 percent in two days because a short-seller released a report calling the company's recent acquisition in Latin America "largely worthless." Last month, the company's stock surged again.

"These stocks have boom-and-bust cycles because it's all very speculative," Greenwald says. "It's very high-risk, high-reward. You might wake up one morning and your stock is down 15 percent. That's not going to happen to you if you are investing in Nike or Coca-Cola."

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